As investors, it is very common for us to look at new investment opportunities and ask ourselves, “what is the potential for financial growth if I put my money into this investment?” Asking this type of questions is only natural because many of us think of our investment portfolios as vehicles towards our own future financial stability or as ways to grow our existing capital. However, much of the time, it may actually benefit investors to not only be aware of the financial impacts that their investments could carry but the social impacts, as well.
This brings us to the term “impact investing.” Impact investing refers to investments that are made with the intention to create a measurable, beneficial social or environmental impact alongside a financial return. Many people also refer to this class of investing as socially responsible investing, or SRI. SRI in practice has become well-known because of its adoption by many corporations, which attempt to make large, socially responsible investments for causes they care about as a part of their corporate missions. However, analysts typically overlook the fact that this method of investment research can actually benefit individual investors, as well. For independent investors, taking the impact investing route can provide the ability to contribute to the causes that the investor personally cares about, while also making smart financial decisions for his or her own future.
The idea of socially responsible investing as it pertains to individual investors is simple. Essentially, in addition to the usual research of a company’s financial metrics and business plans that an investor would typically complete before making his or her investment decisions, a socially responsible investor would also choose to look at measures revolving around the environmental, social, and governance features of an investment. In practice, these measures are referred to as ESG.
The search for ESG metrics is actually much simpler than many investors expect. In fact, ESG research and socially responsible investing extend very easily into many investors’ typical investment research routines because they work well with familiar investment options like stocks and ETFs. This means that socially responsible investing is a practice that can be undertaken even by new or less experienced investors. But, how?
Well, many investors have shown that one can easily discover a company’s social values by searching for the company online. From various news sources and company mission statements, an investor can gain a better understanding of how a company’s functioning may affect the world. Further, other investors have even created “sustainability data providers” which rank popular investments on the basis of both their financial impacts and their given “sustainability scores”. For example, two of the most popular sustainability data providers are MSCI and Morningstar, which both use the daily news to create numerical metrics that represent a company’s sustainability. By finding these evaluations, investors can gain a good idea of both an investment’s economic sustainability prospects, so that they can weigh their options hand in hand.
Now, you might be asking – what is the benefit to going to all of this additional research about my investments? Well, in addition to providing yourself with a direct path towards helping a specific cause, impact investing might also help you to minimize your risk. First, many of the most popular investment options that are considered impact investments come in the form of exchange-traded funds, meaning that investors might inherently find more diversification in their portfolios after switching to impact investing because they would be spreading their assets across more total investments. Second, impact investing might mean investing in companies that are more highly regulated – so as to work towards some form of environmental or social justice. By increasing the regulations that companies adhere to prior to investing in those companies, investors may ultimately end up with less liability. This means that investors may feel less harm from any unethical behaviors that affect a company’s bottom line.
So, with the consideration of both risk management and social change in mind, many younger investors have found value in turning to ESG research before making investments. Now the question becomes, what do you think? Doing the research to find out can never hurt!