Financial returns and social responsibility are no longer mutually exclusive. Impact investing has quickly emerged as a compelling opportunity to prioritize sustainability and public interest alongside profits.
For many socially curious individuals, impact investing raises more questions than it answers. What is considered impact? Can it be quantified? Should it earn a place in your portfolio?
What Is Impact Investing?
Impact investing is a means of generating financial returns through initiatives that result in positive social and environmental impact. Although this practice is relatively new, it echoes the core motivation of philanthropy to leverage capital for the welfare of others.
In contrast to traditional notions of philanthropy, impact investing combines good intentions with measurable social impact and returns on the investment. This offers significant appeal to investors who are motivated to place their money where it will do more than quietly generate profits.
According to the latest report from the Global Impact Investing Network, the market for impact investing now exceeds $1 trillion in assets under management. Assets in areas of impact investing are diverse but broadly contribute to the Sustainable Development Goals (SDGs) outlined by the United Nations. These include, but are not limited to:
- Inclusive finance
- Affordable housing
- Sustainable forestry
- Sustainable agriculture
- Renewable energy
- Energy efficiency
- Green buildings
What Is Social Impact Investing?
Social impact investing is more targeted to initiatives with direct societal benefits—such as education, healthcare, and affordable housing—and those that benefit local economies, such as small business financing.
As younger investors are positioned for a generational wealth transfer, impact investing will continue to grow more mainstream in the coming years. Fidelity Charitable reports that as millennials enter the mid-point of their careers with increased earning potential, the market for socially responsible investing could reach a dramatic tipping point. For many young investors, this strategic approach presents an ideal opportunity to address social change and environmental concerns while simultaneously building wealth.
Why Is Impact Investing Important?
Impact investing adds value to society by directing private capital where it’s most needed to support the public interest. It reinforces ideals of global citizenship and collective responsibility. Impact investing is an avenue to problem solve and proactively address community concerns for greater resilience.
The Impact of Financial Inclusion
Financial inclusion may be the most measurable form of impact investing with regard to returns and social impact. These investments contribute to improving the circumstances of businesses, individuals, and economies while delivering on eight UN Sustainable Development Goals.
Financial inclusion provides banking and financial services, such as loans, to those who otherwise would not have access or opportunity. These investments also include microfinance and SME financing for small and mid-sized enterprises, which enable businesses to secure necessary start-up capital.
Support of SMEs with inclusive financing like SBA loans empowers business expansion, better working conditions, job creation, and increased spending in local communities. Not only are the social outcomes quantifiable, but these investments can also benefit investors with competitive returns that outperform broader markets.
How to Get into Impact Investing
- Learn about the category and themes of investment assets to make informed decisions about where and how to invest.
- Determine the impact you want to make. There are opportunities in almost any asset class with an equivalent to generate social and environmental impact.
- Align research with your values to determine how impact investing can fit into your portfolio.
- Identify trustworthy partners, platforms, and organizations to invest through. For example, if you want to create impact through inclusive financing, you might consider preferred lenders and community development companies that facilitate SBA 504 loans.
- Start the conversation(s). Once you have a clear idea of the investment areas that appeal to you and the vehicles you want to pursue, initiate the discussion with your financial advisor and potential partners. They can offer expertise to guide building your portfolio for social and environmental impact with an appropriate risk-return profile.
Want to learn more about impact investing and financial inclusion opportunities? Contact us to speak with one of our experienced financial professionals.