A Guide to Impact Investing

Lisa Kitchin, CFP® and Wealth Manager, First Republic Investment Management
May 11, 2017

The traditional model of philanthropy created a wall of separation between the drive to make money and the desire to do good in the world; one would invest first and foremost for return, make as much money as possible, and then gift to charity.

Today, however, there are many opportunities to invest in companies that are advancing social and environmental causes while simultaneously generating a positive return. In fact, many investors now seek to align the way they invest their money with their values rather than focus solely on investments that will generate the highest profit.

A new paradigm of impact investing has evolved on the heels of two values-driven models firms have employed for years: Socially Responsible Investing (SRI) and Environmental, Social and Governance (ESG) investing. With SRI, an exclusionary screening approach is applied to avoid investing in companies that sell items that might conflict with personal moral or ethical values (think alcohol, tobacco, weapons or genetically modified foods).

On the other hand, ESG investing utilizes a positive screening approach, identifying best-in-class companies with strong environmental, social and governance policies. Some questions that could be used to determine whether a company qualifies as an ESG investment include: Does the company measure its carbon footprint and have a carbon reduction strategy? Does it have strong employee engagement and retention? Is its management team diverse, including women and minorities? ESG advocates argue that inclusion of these metrics can lead to financial out-performance by reducing energy costs and employee turnover, which in turn can improve a company’s bottom line.

Impact investment is a newer — and, some may say—more direct values-driven model, with the primary objective of solving a social or environmental issue while concurrently generating a positive return. For example, an impact investor might choose to devote his or her funds directly to an alternative energy enterprise (wind or solar), energy efficiency project, or natural and organic food production. It could also mean investing in affordable housing, medical or educational facilities in low-income areas, or in resource management via municipal water infrastructure bonds.

Investment options

Impact investing has traditionally been accessible through two asset types: private equity and/or bonds. Private equity affords the opportunity to invest directly in mission-focused social enterprises and small businesses as opposed to large public companies encompassing multiple departments, services or products. With private equity, impact investors are able to commit their capital to companies that are specifically focused on making a difference.

Bonds create an avenue to invest in a larger company or entity in specific projects that are earmarked for impact. For instance, the World Bank coined the term Green Bonds in 2008 when it began issuing debt earmarked for projects to mitigate climate change. To that end, Green Bonds include everything from investments in energy efficiency, water management and green building to technologies in waste management and agriculture for the purpose of reducing greenhouse gas emissions. By the same token, investors have the ability to access bond issuances by large public companies such as banks or REITs (Real Estate Investment Trusts) that have earmarked corporate debt issuances for solar energy or energy efficiency projects.

Becoming an impact investor

Any investor seeking a direct connection with how their capital is making a difference in the world is a great candidate for impact investing, including high-net-worth individuals, family foundations, donor-advised fund investors and institutional endowments. Women and millennials in particular are currently driving demand for values-driven investments.

If you’re interested in becoming an impact investor, it's important to work with a wealth manager who is knowledgeable about impact investing and can construct a portfolio that is optimal for both impact and financial return. As with more traditional investments, you still need to consider the typical factors that impact your asset allocation mix, such as timeline for the funds, risk profile and your overall goals and objectives. A more accessible option could be ESG investing if you’re just getting started.

Impact investing provides a unique opportunity for clients to achieve the dual objective of making money and creating positive change in the world. Through impact investments in the issues you care about, you may have the opportunity to grow your capital even as you make a greater impact in the world. 

Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.