Tips for aligning your investment dollars with the values that matter to you most.
From your shoes to your car to where you spend your summer vacation, how you spend your money speaks volumes about what you value. Yet when it comes to investing, many people seek only returns without thinking about what their money is supporting. With impact investing, investors are able to be more intentional about where they invest so their portfolios can have positive influence.
“Every portfolio has an impact,” says Kent McClanahan, head of Responsible Investing for RBC Wealth Management–U.S., “but impact investing is about being more conscious of what your money is doing.”
If there is a cause you want to support, you might donate to a nonprofit organization to back their mission. Impact investing is similar in that you invest in assets that intend to generate a measurable, positive environmental or social impact. However, you’re also analyzing these investments on their ability to generate a positive, if not competitive, financial return.
Much like finding a nonprofit to support, start by determining the impact you want to make. Do you want to fund a startup biotech company that provides affordable medications? Or do you want to invest in a clean water fund? Perhaps you want to ease income inequality by financing affordable housing in your city? The goal is to seek investments that directly correlate to your cause, so you know your money is going directly to funding their work.
At the same time, impact investing is not charity—you should expect your investment to generate a financial return in addition to a societal return. How much of a return depends largely on your goals.
“One of the dichotomies within impact investing is whether the expected returns are concessionary or market driven,” says Ron Homer, chief strategist of Impact Investing at RBC Global Asset Management. “There are some impact investment strategies where returns are secondary to the impact. On the opposite side, our strategies are designed to provide the double impact of market returns and social benefits. In some cases, the social benefit can drive excess returns.”
Impact investing is one of four subsets of responsible investing. And while they all can generate desired returns while doing good, each strategy accomplishes that task differently. In addition to impact investing, the three other approaches of responsible investing include:
Unlike the other approaches, when it comes to impact investing, direct and measurable outcomes are key. An impact investment must be focused on investment vehicles that set out to accomplish a specific outcome, such as liters of water purified or number of homes built.
Impact investing is still an emerging approach, with no set standards. This means you may need to dig a little deeper to ensure prospective investments meet your requirements.
The good news is that impact investing is becoming easier for investors. For example, the CFA Institute, Global Sustainable Investment Alliance and Principles for Responsible Investing came together on harmonized definitions and guidelines for responsible investing terms—which includes impact investing. This will help create a benchmark to better guarantee investors are getting positive, measurable impact when impact investing, McClanahan says.
The first step is to choose your areas of focus. According to Homer, the two fastest-growing spaces for impact investments are climate change and reducing social inequality through community development and social justice.
Next, work with your financial advisor to measure the impact of your portfolio and make decisions about how to reallocate investments.
Impact investing allows more of your money to work together to create the most positive impact. “Think about someone who’s using their philanthropic dollars to address an issue because they feel passionate about it, yet their investments are working to support the problem they’re trying to address,” says Homer. “If the issue is important to them and they’re trying to solve it with their vote, volunteerism or philanthropy, putting their money to work on the other side to have an opposite effect doesn’t make a lot of sense.”
Your advisor can help you prioritize all of your various passions and causes so you can optimize your portfolio to make the greatest difference.
Due diligence processes do not assure a profit or protect against loss. Like any type of investing, impact and ESG investing involve risks, including possible loss of principal.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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