ford-econoline.com Credit 101 Social Impact Investing – What It Is and How to Get Started

Social Impact Investing – What It Is and How to Get Started

Social and environmental concerns are major topics in the United States today. Two of the biggest issues currently facing the country have to do with racial and social injustice as well as the environmental impact of burning fossil fuels to provide the power that maintains a developed society.

Consumers across the country are making big changes. Many homeowners are choosing to install solar panels on their roofs, and clean-power producing windmills increasingly pepper the rolling hills in the Midwest.

At the same time, protests surrounding racial injustice are leading to a major conversation in Washington, D.C., where the country’s first Black female vice president, Kamala Harris, works with President Joe Biden in an effort to hammer out solutions.

Naturally, people want to get involved and have a positive social impact. But figuring out how to go about supporting social and environmental changes is challenging for many. The good news is, if you invest, you have the ability to support change through a strategy known as social impact investing.

What Is Social Impact Investing?

In general, your goal when you invest is to generate a financial return. The idea is to buy stocks and other assets at a low price and sell them in the future at a higher price, generating a profit on the price appreciation and, in many cases, through dividend income.

Impact investors have much of the same goal in mind. Ultimately, anyone who invests is looking to generate a profit. However, when you invest, you’re not just giving your money the opportunity to grow in the market — you’re supporting the company or companies you’re investing in.

When you make an impact investment, it’s made in hopes of achieving financial goals while supporting companies taking an active role in causes you believe in.

Investors looking to make a positive impact with their dollars don’t just look at the financial performance of the stocks they invest in. These investors also base their investment decisions on what the companies they invest in are doing with their money and how their actions affect the communities around them.

With social and environmental issues being a hot topic of conversation, the impact investing market is becoming a massive one. Many individual companies are purposely investing in the improvement of their communities, and several exchange-traded funds (ETFs) have emerged that are focused on investing in companies making a difference in at least one area of social impact.

Racial Impact Investing

Racial inequality in the U.S. has taken center stage as of late as recent fatal interactions between unarmed Black men and police sparked outrage. This is no new issue either; it dates back to the days of slavery, according to USA Today.

Unfortunately, the trend continues today. According to NPR, at least 135 unarmed Black men and women have been fatally shot by police officers since 2015.

While police brutality is a major issue, the conversation around racial justice has grown much larger. The facts point to minorities having fewer economic opportunities than white Americans.

Statistics suggest that white Americans have a much better chance of earning a bachelor’s degree or higher, owning a business, and becoming a high income earner than minority Americans, including blacks, Hispanics, and other ethnic groups.

Through socially responsible investing, you have the ability to help fund a change.

To do so, simply look for opportunities to support the minority community while making your investments. For example, invest in companies like Nike and Walmart that have spent massive amounts of money supporting charities that serve minority communities.

You can also invest in companies that are owned by minority leaders. There are tons of Black- and Hispanic-owned publicly traded companies on the stock market today, and investing in them helps to support businesses that are known for giving minorities the opportunity to lead organizations and generate meaningful incomes.

Environmental Impact Investing

Another major topic of conversation in the U.S. is the environmental harm of burning fossil fuels. As time passes, wildfires are burning longer and becoming more difficult to manage, hurricanes are becoming more frequent and more intense, and the world is slowly heating up.

Major changes need to be made to ensure the health of planet Earth and its inhabitants.

Renewable energy is being generated and used more and more. Even major power companies like NextEra Energy are shifting focus away from traditional coal and nuclear power and spending massive amounts of money to develop solar energy and wind energy farms designed to reduce the carbon footprint of energy production and benefit the global ecosystem.

By investing in green energy and environmentally conscious companies, you’ll be supporting businesses that are working to ensure your grandchildren — and their grandchildren — can enjoy a clean, prosperous planet.

Investing around making an environmental impact has become a popular notion. There is a wide array of ETFs that focus on investing in companies that are working to improve environmental conditions or harness clean sources of power.

Educational Impact Investing

Most people would agree that all children should be afforded a quality education regardless of race, religion, or identity. Unfortunately, what should happen and what does happen are often very different things.

In the U.S., the color of your skin has an undue influence on your chances of receiving a quality education. Minority families disproportionately live in low-income communities, and the schools that support these communities are often underfunded.

This lack of quality education starting in grade school makes being accepted to the top colleges in the U.S. more difficult, ultimately hurting minorities’ ability to achieve higher education.

The good news is there are several companies working to combat this problem. Various learning centers are popping up in urban areas with the goal of providing the tools students need to achieve excellence.

There are also plenty of companies that make donations to charities supporting improved education in urban areas. For example, Amazon.com donates to multiple charities supporting improved education through its AmazonSmile program.

Investing in companies that work toward improving educational opportunities in urban communities or in companies that support education through donations is a great way to have an impact on the movement to improve education for all.

Health Care Impact Investing

Health care is another major area in the U.S. that represents a system in desperate need of reform. Health care costs are rising to epic proportions.

Unfortunately, there is a racial component to health care disparities as well. The fact that Blacks are far more likely to die as a result of COVID-19 complications underscores two major issues:

  1. Access. Quality care is more accessible to white Americans than it is to minorities.
  2. Career Opportunities. Minorities are more likely to have lower-income customer service careers. These jobs made it impossible for many in minority communities to work from home during the pandemic, making them more susceptible to contracting the virus.

Considering the above, there’s a serious need for improved access to quality health care among minority communities. Some medical centers are focused on providing health care services to underserved communities.

By investing in those companies, you have the ability to lend a hand in making a change.

Moreover, there are several ailments that still have few or even no therapeutic options. At the same time, there’s a robust community of companies that employ the world’s top scientists in an effort to find solutions for these medical ailments.

By investing in these companies, you’ll be able to sleep well at night, knowing your investments are being used to help find treatment options that will potentially improve the quality and length of life of members within your community and around the world.


The Global Impact Investing Network

The Global Impact Investing Network (GIIN) is a nonprofit organization that exists for the sole purpose of increasing the scale and effectiveness of making social and environmental impacts through investments.

The GIIN website is a compelling source of information, education, and data that will help you support changes through your investments.

The company offers a forum that connects investors who have a similar goal of pushing for change through their investment portfolio. The company has also developed IRIS+, a widely accepted list of performance metrics designed to measure the social, environmental, and financial performance of publicly traded companies.

Perhaps the most valuable section of the GIIN website is its research section. The section provides information including market performance and trends, giving investors a better understanding of the diversity and depth of investing for impact.

Finally, the GIIN offers training designed to give newcomer investors all the tools they need to become successful social impact investors.


Understanding ESG Criteria

As you begin to get involved in socially responsible investing, you’ll likely encounter the term ESG, an abbreviation for environmental, social, and governance.

Some of the largest institutional investors, private equity firms, venture capital firms, ETFs, and even some personal financial institutions are adopting ESG criteria to identify high social impact investments.

The ESG investing strategy considers the three metrics that are most important in measuring the sustainability and societal impact of an investment.

Investors looking to make an impact with their investments use these criteria when assessing investment opportunities both from a social and environmental perspective as well as from a financial perspective to ensure a sustainable investing plan.

1. Environmental

Environmental criteria center around how the company performs as a steward of nature. For example, companies with a focus on the environment often use clean energy or offset their carbon footprint by planting trees.

These companies may also make investments in companies that focus on the provision of clean energy or donate to charities with a core focus on environmental health and sustainability.

2. Social

The social criteria in the ESG score are based on how a company manages its relationships with employees, suppliers, customers, and the communities in which it operates.

Companies that make a strong social impact investment provide compelling employment experiences, treat their suppliers and customers with the utmost respect, and invest in their communities through charitable donations and community outreach programs.

3. Governance

Finally, governance relates to the company’s leadership. Governance metrics include executive compensation, audits, internal controls, and shareholder rights. Companies with strong governance offer executives competitive compensation but avoid overpaying them.

Moreover, these companies provide transparency in terms of financial reporting, display a high level of respect for their shareholders, and have strong internal controls in place to ensure longevity, including thorough balance sheet practices, debt controls, and the retention of enough earnings to make it through hard times.

Essentially, companies with strong governance are managed well and show appreciation for the shareholders who fund their growth.


How to Get Started as an Impact Investor

If you’re an individual investor looking to make an impact, you’ll be delighted to find that getting started is relatively simple. As with any other form of investing, the key is finding quality companies that align well with your goals.

So, how do you go about doing that? The steps below will put you on the right track:

1. Start With Industries You Know Well

Whether you want to invest in the traditional sense or you’re looking to make a social or environmental impact with your investments, it’s important to start by looking for opportunities in industries that you understand.

Successful investors will tell you the key to making money in the stock market is research. So, if you know an industry well, you’ve got a leg up. Not to mention, if you know an industry, there’s a strong chance the industry interests you — otherwise, why would you know anything about it?

Although it’s possible to make money investing in sectors that you don’t find interesting at all, you’re more likely to do deeper research when investing in something that grabs your attention. The increased depth of research you’re willing to do will likely pay off in the long run.

Start by diving into the industries you know, and making a list of three to five stocks representing brands you know and use.

2. Assess the ESG Criteria of the Investment

Once you have your list together, look into the ESG criteria of each stock on your list. One quick way to do this is by using the Yahoo! Finance ESG Risk tool. You can find this under the Sustainability tab on any stock ticker’s quote page.

For example, if you’re interested in Apple, you could type https://finance.yahoo.com/quote/AAPL/sustainability/ into your address bar, or look up Apple’s stock quote page on the site and click on the Sustainability header.

This tool is designed to provide easy-to-read risk analytics based on the environmental, social, and governance risk rating system developed by SustainAnalytics, which looks into ESG criteria and outlines any risks in an easy-to-read score.

When using the tool on Yahoo! Finance, you’ll be provided with an overall risk score. Under the score, you’ll see whether the stock comes with low, moderate, or high risk from an impact standpoint.

If the risk rating is low, continue your research; chances are you’ve found a highly impactful investment. If the risk rating is high, scratch the stock off your list and move on to the next.

At this point, your list will be a bit smaller. Now it’s time to dive in with some research based on the impact you’re looking to make. If you’re looking to make an environmental impact, look into what the company is doing to offset its carbon footprint and research its charitable contributions centered around environmental causes.

If you’re looking to make a social impact, research what the company is doing to improve opportunities in urban areas and its charitable contributions to causes that you find most important.

When doing this research, if you find the company you’re interested in to be making a meaningful impact when it comes to causes you care about, you’re on the right track. If the company you’re interested in isn’t making a meaningful impact, scratch the name off your list.

3. Assess the Investment Through Traditional Due Diligence

Making an impact with your investing dollars is important, but it’s also important to make money. Even if the company is making a massive impact on causes you care about, if you lose money in your investment, you’re not growing your wealth.

So, you should always do traditional research to make sure any stock you’re interested in buying aligns with your investing strategy.

Look into the historic performance of the stock, the company’s management team, the size of the market the company is working to tap into, and how well the company has done in terms of reaching its audience.

You’ll also want to dive into intellectual property and innovation that leads to an economic moat and the company’s ability to lead within its industry. If you find any red flags while doing your due diligence, scratch the stock off your list.

4. Invest in the Stocks Left on Your List

The stocks left on your list should represent companies that are making a difference in the social and environmental areas you care about while also representing strong investment opportunities according to your investing strategy.

Now, it’s time to determine how much money you’ll allocate to each stock left on your list and make your investments. If you’re a newcomer to investing, consider using the 5% rule as an allocation strategy.

5. Rinse and Repeat

At this point, you’ve likely made investments in one or two stocks. However, a properly diversified investment portfolio should consist of quite a few more securities than one or two.

Simply go back to step one and choose another three to five stocks to dive into and follow these steps until you have a portfolio of securities that have significant potential to generate a profit while making a difference in your community and around the world.


Consider Socially and Environmentally Responsible Investment Funds

Investing in individual stocks can be an arduous process. The amount of research required to make wise investment decisions often turns people off to the concept of investing as a whole, but it shouldn’t.

There are several investment-grade funds that provide access to a well-diversified portfolio of stocks, giving you exposure to the market without the requirement of researching each and every stock within your portfolio.

In fact, there are several exchange-traded funds (ETFs) on the market that are centered around making sustainable, socially responsible investments.

If you decide to invest in ESG or social impact ETFs, pay close attention to the fund’s historic performance, expense ratio, and asset allocation to ensure you know exactly what you’re investing in and what to expect from the fund.


Final Word

In the traditional sense, investing has been about building wealth, and that will never change.

However, one thing that is changing is the fact that investors are realizing their portfolios can make major differences not only in their own wealth but also in their communities and around the world.

As is always the case, the most successful investments are those that are made following deep research. Whether you’re investing to grow your wealth or a mix of impact and wealth-building, it’s important to do your research and get a strong understanding of exactly what you’re investing your money into.

Source: moneycrashers.com