What Is Impact Investing? And Is It Worth It?
7 MINUTE READ
We all want to make a positive impact on the world around us, and we’re willing to give our money and our time to help causes we’re on fire for. But what if you could do more than just give to a cause? What if you could invest in it, too?
That idea isn’t new, but it’s gained a lot of steam in recent years, especially among younger investors. All this has led to the rise of an investing trend called impact investing. You may ask, “Hogan, what exactly is impact investing?” That’s a good question. Is it really making the world (or your investing portfolio) better off?
That’s a good question, too. Let’s break it all down.
What is impact investing?
Impact investing aims to benefit society and provide a profit for the investor by investing in companies, organizations and funds that are aligned with certain issues, causes or values. Think of it as a middle ground between traditional investing and charitable giving.
Just how big is impact investing today? Roughly $12 trillion is currently invested in socially responsible investments (including impact investments), which represents about a quarter of all professionally managed assets in the U.S.1 That’s nothing to sneeze at!
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This type of socially conscious investing has attracted a wide variety of investors—from individuals and small businesses to nonprofit organizations and religious institutions—who are interested in putting their money to good use.
But listen to me: Just because a bunch of your well-meaning friends are diving into the world of impact investing doesn’t mean it’s the right choice for you. Let’s dig a little deeper.
How does impact investing work?
In reality, impact investing really isn’t all that different from investing in traditional mutual funds—the biggest difference is what the fund’s goals are.
For example, let’s say you’re passionate about providing access to technology to low-income neighborhoods and want to invest in companies dedicated to that cause.
First, you want to find an impact investing fund made up of companies that provide access to technology for folks in those communities. Then, you’ll invest money into those projects and companies that specialize in that particular cause. Pretty straightforward, right?
If there’s a particular issue that tugs at your heartstrings, there’s probably a fund somewhere out there that invests in companies trying to tackle that issue. Some of the common areas of interest for impact investors include:
- Sustainable trade
- Low-income housing
- Carbon emissions
- Clean energy
- Toxic emissions and waste
- Clean drinking water
- Health and safety of employees
Now, there are hundreds of different impact investing funds to choose from. So how do you know which funds might actually be good to add to your portfolio? First, you’ll want to sit down with an investing professional who can help you go over your options. That’s always a good idea, no matter what you’re investing in.
Does impact investing really work?
Like I mentioned earlier, impact investing has two goals: to make a difference in the world and to make the investor money. So how does impact investing work for both sides? Let’s take a look.
1. How do impact investment funds perform?
Well, it depends. Some impact investment funds intentionally invest knowing they’ll get lower returns. That’s because they’re more concerned with accomplishing their social or environmental goals than returning a profit. Other impact investments try to bring in returns that are competitive with the stock market.
Still, according to a study by the Global Impact Investing Network (GIIN), impact investments have average returns of 5.8% since their inception.2 That’s well below the average return of the S&P 500 (approximately 10%). I don’t know about you, but those numbers don’t fill me with confidence.
In other words, your impact investment funds might not perform as well as traditional mutual funds.
2. Does impact investing really make a difference?
The jury is still out on this one too. While it’s pretty easy to measure how impact investments perform financially, it’s a little trickier to evaluate how much they actually make a difference for the causes. Too often, investors are left guessing and hoping their investment dollars are being invested in companies and causes that are doing some good.3 That’s easier said than done.
Here’s the deal: Impact investing is still pretty new and, in many cases, there’s very little accountability and no standard to measure progress against. A company might say it’s taking steps to clean the environment, but who’s making sure it delivers on the promises?
The good news is that companies and fund managers are beginning to catch on. Many companies are starting to self-report on their efforts to have a positive impact on the environment, social causes and culture overall. So that’s progress!
Listen, I do believe that impact investing can do some good. But it’s hard to measure how much good it’s actually doing. If you’re going to invest in impact investing funds, you need to make sure you understand how your money is going to help the businesses you invest in and how they, in turn, will make the world a better place.
Should I dive into impact investing?
This is your money. These are your values. At the end of the day, it’s up to you to do your homework on impact investments and decide whether or not to invest based on your values and principles. No one can make that decision for you!
Here’s what I will tell you: If you don’t understand it, don’t invest in it. Make sure you feel comfortable investing in something before you hand over your money. If some fund manager can’t tell you how your money will make an impact or give you a return on your investment, it’s probably not worth the trouble.
For those who want to make a difference, there are some alternatives to impact investing you should consider—like investing the old-fashioned way and making room in your budget for charitable giving or saving with the intention of giving to causes and organizations you care about down the line. You could even do both!
Personally? I want my investments spread out evenly between four types of mutual funds: growth, growth and income, aggressive growth, and international. And I look for funds that have a long history of strong returns (think 10 years or longer). That way, I can sleep easier knowing I don’t have my nest egg tied up in one basket and I’m invested in funds that have stood up to the test of time.
To learn more about using mutual funds to build wealth, check out my book, Everyday Millionaires: How Ordinary People Built Extraordinary Wealth—And How You Can Too.
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Okay, I can’t begin to stress how important it is to work with a financial advisor. It doesn’t matter if you’re just starting out or if you’ve been investing for years. Having a pro on your side to help you make confident decisions about your investments is always a good idea!
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About Chris Hogan
Chris Hogan is a #1 national bestselling author, dynamic speaker and financial expert. For more than a decade, Hogan has served at Ramsey Solutions, spreading a message of hope to audiences across the country as a financial coach and Ramsey Personality. Hogan challenges and equips people to take control of their money and reach their financial goals, using The Chris Hogan Show, his national TV appearances, and live events across the nation. His second book, Everyday Millionaires: How Ordinary People Built Extraordinary Wealth—And How You Can Too is based on the largest study of net-worth millionaires ever conducted. You can follow Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.