For many of us, the past couple of years have been eye-opening. From the pandemic to the climate crisis and everything in between, the state of the world has had a lot of people researching new ways to make more of a difference in daily life.
To that end, you might have come across the term “impact investing.” It’s a fresh approach that allows us to create meaningful social change through the companies and funds we choose to invest with. Read on to get some fast facts about impact investing — it could be just the strategy you’ve been looking for.
1. Impact investing is about changing the world for the better
Impact investing as a concept has only really been A Thing™ for a little over a decade. The term itself was coined by the Rockefeller Foundation back in 2007. They used it to describe the desire of up-and-coming generations — millennials at the time, but now Gen Z too — to avoid supporting industries that compromised their values.
Today, impact investing is guided by a number of different standards (depending on where you invest) that use rigorous criteria to determine whether an investment is worth including in an “impact portfolio.” The UN’s Sustainable Development Goals (or SDGs) are one set, for example.
At Ellevest, we use several criteria to help you invest for impact, including an ESG (Environmental, Social, and Governance) framework. These standards are guidelines that allow fund managers to build portfolios with investments in companies that are committed to social, environmental, and economic change.
2. You can invest for impact in more than one way
Ellevest was founded with the goal of getting more money into the hands of women+, so our approach to impact investing is through a gender lens — specifically to help advance women and non-binary people economically, whether supporting their small businesses or supporting companies that promote and pay them equally.
But there are a lot more ways to invest for impact beyond gender, from environmental sustainability to racial justice to labor equity to firearm regulation. It’s designed to help you match your investment strategy with the better world you want to see — to make the impact that matters to you.
3. You don’t have to sacrifice returns to invest for impact
It is the duty of a fiduciary like us (as in, legally) to act in the best interest of our clients. In investing, that means building out portfolios that will, first and foremost, offer clients the best shot at competitive market returns while minimizing fees. And because the standards to qualify for an impact investment fund are so high, and mass-market impact investment funds are so new, there actually aren’t enough out there (yet!) to build an entire portfolio on our digital investing platform that can still meet the fiduciary’s responsibility criteria. (Private Wealth Management is a different story.)
But until that happens (it would definitely be nice to have way more companies actively working to advance women or lower their carbon footprint, right?), we balance the two as best we can. Most impact portfolios — Ellevest members’ included — are a blend of impact investments and more mainstream investments that help your market returns keep pace with those you’d otherwise see with a “core” portfolio.
4. Impact portfolios can actually help reduce investors’ risk
We’ve never had so much immediate access to information about the companies we invest in, much less the people who run them. Thanks to the internet and social media, these days, a company’s stock can live or die by everything from a data breach to a damning whistleblower report to a CEO’s bad tweet. (Hello, Elon.)
While this might seem like a bad thing for the market, it actually just sets a different — and higher — standard for what a good investment looks like today. A company with a hostile internal culture, for example, might be losing a lot of its money to high employee turnover, lawsuits, and a damaged reputation, which makes it a far riskier bet for investors. Similarly, if a company doesn’t commit to sustainability practices or fails to protect its customers’ data, it can lose public trust and suffer financially.
Investing in companies with high ESG and diversity standards (ie, the type of companies selected for impact portfolios) is an investing strategy, much like diversifying your portfolio, that can be used to help reduce risk overall.
5. It’s catching on
Case in point: Over the next 30 years, as millennials start inheriting their parents’ and grandparents’ wealth, an estimated $40 trillion (yes, trillion) will be transferred from generation to generation. Assets in sustainable investment funds tripled between 2012 and 2017, and those numbers skyrocketed even higher with the onset of the pandemic. This all suggests that as all this wealth starts changing hands, we’re going to see a lot more investors hesitating before blindly investing in industries like weapons and big oil (y’know, just for example).
6. Impact investing is for everyone
It used to be the case that you had to have a lot of money to invest for impact, because the only way to do it was with a fully customized, actively managed portfolio. But today, with the advent of impact-focused ETFs and other accessible types of investments, that couldn’t be farther from the truth.
Whether you have $1 to invest or $1 million, the money you invest has an impact on the world, and you have a right to decide what that impact looks like. Become an Ellevest client today to start investing for impact.
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