There is more to life than building wealth, enjoying family and taking a spontaneous personal day every few months. As we enter the season of giving, it’s time to reflect on how we can do more with a greater purpose and intent.
Since we all have a myriad of personal and professional responsibilities, any spare time we have is precious. We can use that time to volunteer for causes and organizations that align with our values, or we can commit to giving charitable contributions that will create a positive impact in our communities. A $10 bill donated to the local food bank at the local grocery store checkout will help families enjoy a Thanksgiving meal, and it’s certainly a great start.
But, what if there was a way to make that $10 bill do double duty by investing it instead?
It’s not always about return on investment—it’s about rethinking ROI as "return on impact." You can make a difference by exploring options beyond the traditional investment products and into the fascinating world of social impact investing.
What Is Impact Investing?
You can have your cake and eat it too. Impact investing allows you to combine your desire to change the world and make smart investments. The best part is that your investments (money) align with the causes and issues that matter to you (heart), creating a feel-good mentality.
Impact investing portfolios mainly exist to provide investors with a financial return while supporting companies and organizations whose primary mission is to create social and environmental change. Think clean water in developing countries, providing affordable housing for low-income families or creating clean energy options in rural communities across the world.Impact investing and philanthropy are often compared because they both serve to create opportunity for people in situations where little or none currently exist. The critical difference between the two, though, is that philanthropy does not expect a return on its financial investment.
How Does Impact Investing Work?
As I mentioned earlier, impact investing funds invest money exclusively into entities and organizations that have a mission of social and environmental change. Many of these companies are startups that are making a difference around the world. Returns can be comparable to traditional investing with the added benefit of knowing that the investment is having a global impact.
This is quite different from investing in companies that act responsibly by using recycled materials to make their products or that commit to giving a portion of their profits to charity. While these actions are important and can influence investor behavior, impact investing places companies with a primary focus on social and/or environmental change in an impact investing fund.
When Impact Investing Is Worth It
Only you can determine if impact investing is worth it. Similar to traditional investment options, impact investing platforms typically provide options based on investor preferences.
For example, if the social impact is more important than the financial return, you would invest in an impact-focused fund—an investment with a core purpose to create positive social impact and may result in little to no return.
Another benefit to these funds is the minimal amount of money that is required to begin making a difference. Kiva, a 501(c)3 United States nonprofit, is an example of a micro-lending firm that provides loans to borrowers looking to create a better future for themselves and their communities. When the loan is repaid, the lenders use this money to fund new investments, donate to a good cause or keep it for themselves.
When Finance-Focused Funds Are More Appropriate
If your priority is the financial return on investment, then private debt and equity funds might be more appropriate. Such funds, known as finance-focused funds, are likely to have minimum initial contribution amounts and pre-established rates of return based on total annual contributions. Be mindful of investment and administrative fees, which can eat at your overall fund performance.
Lastly, you can consider the returns of both the social and financial impact with a blended or balanced fund, which is arguably the most common type of impact investment fund. Instead of expecting low or no return on investment, or letting finances be the primary driver in decision-making, a balanced fund allows a social impact investment that brings you the best of both worlds.
Impact investing is worth it when you are clear on your expectations for your return on investment. Find the social causes that are most important to you, and if interested in moving forward with your investment, work with a CERTIFIED FINANCIAL PLANNER™ professional to determine how much you can realistically set aside to invest, identify the funds that align with the required minimum rate of return you would like to achieve, and help you monitor investment performance.
Regardless of the decision that you make, your ability to make a difference in this world with impact investing has never been greater.