Impact Investing for the 99%
Impact investing has been the rage in the social impact field for a while now. It’s all about how you can invest money for positive financial, social and environmental returns. Make money and do good at the same time—wow!
How can you take part and use some of your investment dollars to do good?
Now let’s assume you are not working full-time as a venture capitalist or for General Atlantic (if you are, fantastic, please do more impact investments!!!).
Say instead you are individual and you have some investments that are held as a diversified allocation in your pension / 401k, and maybe a little in a brokerage account too. You would usually have a bunch of mutual funds and/or ETFs in those accounts.
If you have no idea what I am talking about (ETFs? Brokerage account?!), do go check your pension / 401k statements, and do please read Vicki Robin and Joe Dominguez’s book Your Money or Your Life, or my favorite personal finance blog, Financial Samurai. I am a firm believer that you need to take control of your personal finances, as money is a key lever for you to exercise power and have positive impact both through giving, but also investing.
Back to your 401k and brokerage account. Say one of the funds you own in one of your accounts is an energy mutual fund. Instead of investing your money there, which will include a bunch of oil fields and coal companies, you can invest in a green energy fund that focuses on solar and wind.
Or depending on your risk tolerance and capital allocation, you could even invest directly in a solar off-grid for-profit company that helps those without access to clean and affordable energy get connected. (Noting that most personal finance books and blogs would advise no more than 5-10% to venture investments, and to only wade into these waters once you have already accumulated a lot of capital across a diversified portfolio of equity, fixed income, real estate, and emergency cash.)
If this whole impact investing thing sounds too good to be true, I would say that it is, to some extent, although overall I am very bullish on impact investing.
First, let’s start with why it’s too good to be quite true:
It’s still a tiny part of the overall investing world.
It’s still a tiny part of the overall philanthropic / social impact world.
Lots of stuff that is only doing a little bit better than the baseline of doing evil by default gets lumped into “impact investing.”
It’s really hard to do impact investing well if you are not part of the 1%, i.e., you don’t have private capital to deploy, because there are not that many true impact investments for the average retail investor in your pension fund / 401k.
Because it’s not that developed, it’s (slightly) more expensive to do in terms of transaction costs.
The impact investing field has a chip on its shoulder compared to point 1. So many actors spend a lot of time trying to show that you can make “market rate” returns while doing good, instead of actually trying to change the system to focus more on impact.
Many problems facing the most underserved do need grant or government funding regardless, and not everything is a market, so this is not the silver bullet which will solve everything.
Ok, so not a great start here. So why do I care about impact investing? And why should you?
Every investment you make – in your pension / 401k, in your brokerage account, as a private investor—has a positive impact, a negative impact, or a mix of both.
If your 401k or brokerage accounts are invested in a broad set of mutual funds, you’re invested in a broad set of public companies that reflect your country market or the global market say through the S&P 500 or FTSE1000, the respective large cap indices of the US and the UK. By default, that will include: armament, tobacco, oil companies, private prisons, and more. There will be companies there whose human rights and environmental records are less than stellar.
Even the balances of your current and savings account are not neutral assets. They can be invested in things that have a positive impact, or with banks that still discriminate against Black, Brown and Indigenous people. So, if you’re not intentionally invested for impact, by default some of your portfolio is having a negative impact. Which would you prefer?
Now, unless you’re buying individual stocks or investing directly in companies (which I don’t recommend unless you really know what you are doing and you are very well off but the WallStreetBets Redditors would tell you differently), it is true that it’s hard to know in detail what you are invested in. Transparency is a key issue the sector needs to resolve.
If you care about impact, you probably wouldn’t buy a T-shirt from a company which is in the news a lot for employing child labor in its factories, and who has been fined multiple times for polluting nearby rivers. You would likely find a T-shirt elsewhere, at least until there seems to be a mea culpa and a series of measures put in place (whether or not these are effective, who knows?).
But if you’re invested in a broad market index, you could very likely have shares in their company without even realizing it. Why should your investments not match your values?
Now, if you want to be more intentional about being invested for impact, what can you do?
As a retail investor, your options are somewhat limited, but growing, and let me be clear, everything I tell you below should not be construed as investment advice by any means. I am just using examples to illustrate the point, please do your own due diligence or go talk to your advisors!
For your cash, there are banks that offer checking and savings accounts that focus on positive impact such as in the US: Amalgamated Bank or the newer Aspiration, both certified B-Corporations.
In the fixed income space, there are green bond funds, for example the global BGRN by iShares. You can also invest in Community Development Finance Institutions (CDFIs) in the United States, which according to Opportunity Finance Network (the largest association of CDFIs): “are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream.”
The good news is that the CDFIs typically hold a lot in reserves, and have good repayment history, so they are considered quite safe investments although like any investment, there is always a risk. Calvert Impact Capital’s Community Investment Note and the newcomer CNote offer easy ways for retail investors to invest in a broad swath of CDFIs, for example.
In stocks, providing you adopt a diversified passive portfolio strategy, there are ESG-screened funds available such as JUST or ESGE. These focus on three categories: environmental, social and governance. Sometimes you have to pay a slightly higher expense ratio (but you can find some for under 0.2%). The issue is that these are so far still pretty low in terms of the bar for impact. They screen out the really bad actors but stay with a lot of companies whose records might not be stellar. And by and large, their strategy is negative “take out the bad stuff” rather than positive, “find and invest in the good stuff.”
For many people, real estate, that is to say owning your home, will be a main way to build wealth. In that realm, too, there are things you can do to improve your impact, whether it’s making sure your house is energy-efficient, perhaps installing solar panels to heat your home; being sensitive to gentrification in the area where you choose to live and ensuring there remains affordable options for long-time and low-income residents; supporting your local council to preserve land in your area, and so on.
For those rich enough to have a wealth manager, there are quite a few more options for dedicated portfolio construction. The big banks are not necessarily leading the way, but many are catching up (often they bought up smaller dedicated impact wealth managers to do so). Check out another B-Corporation Veris Wealth Partners or Trillium, which uses an active shareholder approach to propel companies to change their ESG performance.
What’s interesting is that for all the talk about impact investing, few people are actually doing it, or at least in an intentional way across their whole portfolio.
I have to admit I am not 100% invested for impact myself, although in recent years I have moved a lot of my portfolio in the right direction.
The good news is that a number of impact-aligned strategies have shown over recent years that they can match or even outperform the “market” based on adjusted risk / returns. In fact, during the financial crisis of 2007-2008, and when the markets tumbled briefly in March 2020 at the beginning of the pandemic, a number of impact-aligned portfolios fared better, i.e., they lost less money.
The New York Times reported in August 2020 that “Impact investments, which aim to promote a social good or prevent a social ill, have significantly outperformed traditional bets during the coronavirus pandemic. And their returns are enticing hesitant investors to rework their portfolios.
“Overall, 64 percent of actively managed E.S.G. funds beat their benchmarks versus 49 percent of traditional funds through the first week in August, according to research from RBC Capital Markets.”
This makes intuitive sense, especially if your time horizon is decades, which it should be. Climate change is real, and more and more governments will take action and regulate to mitigate and adapt to it. More and more people will care, especially young people. Renewable energies will get subsidies and will be more and more chosen by individuals and companies, while polluting industries will get taxed more.
Thus, your portfolio will over time do better with a pro-climate strategy, even if today in the US, oil companies do get subsidies, and fracking has proven to be a boon short-term. But Exxon, once the valuable company in the S&P500, was kicked out of the top index dropping below 500th place in 2020. For me, it’s short-term thinking not to invest in pro-climate strategies–even if you only cared about making money, which I hope you don’t!
Finally - don’t discount other investment pools you might have influence over: the investments your parents and family make, for example, the endowment of your university or other institutions you might be affiliated with, and more.
You will have likely heard of student divestment campaigns. Some of the biggest results: Columbia University divested from private prisons; the New School divested its $340 million endowment from fossil fuels and reinvested it in climate solutions; Oberlin invested $5 million in responsible investments.
The important thing to remember is that through the money you have yourself or have influence over, you have power to have a positive or negative impact. So, be intentional in using that power for good!
