Hundreds of years ago several people in a town in the United Kingdom contracted a mysterious and serious illness.  The best doctors and scientists gathered from all over the world to determine the cause.  After several weeks, the city’s council was told that the cause could not be identified with certainty but had something to do with the water.  Given its limited budget, the city could implement only one of two possible alternatives: (1) cure those who were ill or (2) treat the source of the water to ensure no one else got sick.  The decision was tough but they agreed that using the funds to treat the water not only prevented future illness but also was a learning opportunity to teach the people of the town how to treat the water, thus creating a sustainable system.

The process of investing is evolving along a similar path toward solutions that are progressive, sustainable, and increase social welfare.  Traditionally, portfolios have been built by selecting those companies, sectors, and markets that are expected to provide the highest financial return given an acceptable amount of risk to achieve long term goals and objectives.   The success or failure of the portfolio was based on the amount of money gained or lost over a finite time period.  However, today, a new type of investing – impact investing – seeks not just the achievement of financial rewards but also social goals. It satisfies a deeper need on the part of investors to know not just that their money is growing but also helping their social causes or communities of interest.

Before you consider adding impact investing to your existing investment strategy, you must understand:  (1) the different types of impact investing; (2) how to evaluate your impact investments; and (3) how to create a personalized strategy for impact investing.

Types of impact investing
There are three categories of impact investing, which are not exclusive and often overlap:

  • Socially responsible investing (SRI): generally involves screening investments to minimize negative social or environmental impacts.  For example, a SRI fund may be managed to exclude tobacco and alcohol manufacturers and distributors, and/or owners of casinos and gambling enterprises. 
  • Sustainable investing: based on the integration of environmental, social and governance (ESG) factors into the more traditional analysis of investment return and risk.  Sustainable investments might involve funding businesses that focus on products and services designed for the future, and avoiding those businesses that pursue harmful or unsustainable practices.  An example of a sustainable investment that passes an ESG screen might be stock in a company that seeks diversity among its employees, packages its products in materials that are environmentally friendly, and regularly contributes to the local community in which it operates.
  • Social impact investing: represents a very recent evolution from sustainable investing to incorporate systems and metrics for measuring and evaluating the social, economic and/or environmental impacts of an investment.  For example, an impact investment in a housing project might be evaluated in terms of the numbers of low income families, or individuals with disabilities who are provided for.  These metrics would then be considered along with standard financial metrics by social impact investors interested in helping disadvantaged populations.

Evaluation process
There are several resources available to support your impact investing.  One such resource is the Global Impact Investment Network (GIIN), a nonprofit organization dedicated to the effectiveness of impact investing.   GIIN provides a list of all of the funds that choose to add non-financial metrics to their overall performance and review.  Such metrics might include data on environmental impact, progress toward gender equality, and the number of new jobs created. There are also free online courses provided by portals like Novo on Social Impact.  These courses demonstrate in detail how a typical impact investment is evaluated and the process each manager has to go through to measure and publish the metrics.  A practical tool, similar to Morningstar ratings, is the Global Impact Investing Ratings System (GIIRS), which provides summaries of social impact funds and their non-financial returns.

Strategy for incorporating impact investing in your portfolio
There are no standards for how much one should invest in impact investing.  This is a completely personal decision, based on your own objectives and values.   You might begin by committing a certain percentage of your existing portfolio to impact investing, for example 20 percent of your investment portfolio.  From there you can further define the type of impact investing you will pursue: i.e., socially responsible, sustainable investing or social impact funds.  Another strategy is to build a separate portfolio for impact investing, without trying to integrate it into a more traditional investment portfolio.  This may be desirable in cases where the separate portfolio is intended for multigenerational wealth, philanthropy or education.

Investing today has a deeper purpose and so should your overall financial planning.  The comprehensive process of planning should include clear goals, expectations and involvement of a Certified Financial Planner™ professional.

Take advantage of including social impact investments into a portion of your portfolio. While it may not give you the highest financial return, it will empower you to focus on what really counts in life – contributing towards a sustainable community.

Elaine King CFP®, CDFA™, partner and director of WE Family Offices, is an international bestselling author of two award winning books and Founder of Family and Money Matters. Inc., - a Latin America focused -socially responsible entity whose mission is to help families achieve financial well-being.