Questions All Impact Investors Should Ask Themselves Before Investing

Thanks to the growing popularity of impact investing strategies (i.e., those that seek to support environmental or social change in the pursuit of financial returns), a debate rages on about which methods are the ones to pursue.

Private and public approaches to impact investing each come with their own inherent benefits, drawbacks, and risks. Private investments may happen on a much smaller scale (by household, perhaps), and may only be available to certain types of high net worth investors. Investments in publicly traded companies and funds are pooled into large scale investments, making the contributions of any single retail investor less impactful.

The contrasts between the two don't begin and end with what's above. Determining where you want to invest depends greatly on how much risk you're willing to incur and — ultimately — at what level and to what degree you want to see your investment make a difference.

Private Investments

Private investments can take many different forms. For example, converting your home to solar power, which requires a capital investment that ultimately could generate positive environmental and financial returns, is a popular private impact investment. So is buying an electric car or hybrid vehicle to reduce your family's carbon footprint.

If you've stowed away some extra savings thanks to your solar-powered home and electric vehicle, you could invest in organic farms, wind farms, sustainable timber acreage, or an organic food startup. You could also invest in a CD issued by a community development financial institution (“CDFI”), thereby providing funding to a bank or credit union that lends money to low-income neighborhoods to support individuals, small businesses, and community redevelopment projects.

As an individual investor, there are countless creative ways to make an impact while growing your wealth. You don’t have to invest alone, either. Angel investing networks such as Social Venture Circle and others bring groups of angel investors together to help fund early-stage companies that seek to bring about positive change in the world.

While many private investments aren't accessible unless you’re an accredited investor (currently determined by your income and net worth), you can still allocate your dollars to eco-friendly products and services and make an impact at the household level.

Public Investments

Some publicly traded companies possess a core business model that lends itself to positive social or environmental change. The vast majority of large corporations don’t have the express goal of changing the world for the better with their products or services. For example, there’s no such thing as a publicly-traded organic farming company due to all organic farming companies still being still too small to go public.

Unlike most individual companies, however, mutual funds provide investors with a direct outlet for supporting specific, measurable change on a large scale. There are primarily two ways that they do this.

First, socially responsible mutual funds are able to influence corporate behavior through regular engagement with the management teams and boards of their portfolio companies.

Mutual funds can also make a significant impact by funding community development financial institutions with a portion of their cash.

Understanding Risks

While private investments offer more flexibility, they’re usually riskier than public investments because they involve much smaller enterprises. That said, some private investments are less risky than others. Being a depositor at or buying a CD from a CDFI is a relatively low-risk decision because your investment is federally insured.

On the other hand, public investment can involve significant risk if the investment is in companies that don’t care about issues like environmental sustainability, for instance. Such companies often have off-balance-sheet liabilities due to the environmental or social risks associated with their business models. In 2010, the Deepwater Horizon oil spill provided a devastating example of the risks associated with investing in a company without considering its performance related to environmental, social, and governance factors.

Questions to Guide You

As you search for answers about where to put your money, it can be helpful to ask yourself some questions. In addition to conducting an honest assessment of your goals — in terms of financial returns and the larger impact you’re hoping to achieve through investing — ask yourself the following:

1. What investment methods am I already using? How are you currently investing your cash? Where is it deposited? Can you put it to work in support of a cause you care about by moving it to a community development bank or credit union? Do you invest in mutual funds that are engaging with corporate management teams to compel them to change? Do these funds regularly publish an impact report?
2. What shape is my portfolio in? What do your private investments look like? Are there any new private investments you can make that will gradually increase the impact of your portfolio?
3. What do I know about my current investments? Are you screening your investments for performance across a range of environmental, social, and governance factors? How certain are you that your portfolio doesn’t include holdings in tobacco companies or gun manufacturers (or other types of companies you’d feel uncomfortable supporting)?

Investing in initiatives you truly care about is admirable, but making sure those investments make your desired impact takes work. It takes figuring out to what degree you want your investments to matter, then doing necessary assessment — not only of the potential investment, but also of what you personally bring to the table.

Impact investing becomes impactful when the necessary steps are taken and the research is done. When those two elements come together, socially responsible investments may bring the dividends envisioned to you personally and the community as a whole.

By Adam Strauss, Contributor