Wealth creation is important; however, some high-net-worth investors also want their portfolios to align with their values. From climate change to healthcare to equality, there are many ways that investors might use their capital to drive positive change. Perhaps you’ve thought about it. But how do you know if impact investing is appropriate for you?
Wealthy investors have many choices when it comes to impact investing. As environmental, social, and governance (ESG) investing has gained popularity1, so too have strategies that give investors the opportunity to pursue measurable social or environmental benefits alongside financial returns.
Here is some information that helps explain your options and things to consider.
What Is Impact Investing?
Impact investments are investments made with the intent of producing a positive and measurable (social or environmental) impact, alongside a financial return.
Impact investing can differ from traditional investing strategies in that it doesn't focus solely on profit maximization. Instead, impact investments have the goal of seeking measurable social or environmental impact combined with a financial return.
These investments you make are not donations given to nonprofits. Instead, they are investments in potentially profitable enterprises that are doing what you consider to be good work, while also trying to make a profit.
A public benefit corporation2 (also called a “B” corp.) is an example of a legal entity format designed with impact investing strategies in mind.
Impact investments may be made to support:
● Renewable energy
● Affordable and workforce housing
● Food security
● Agricultural sustainability
● Clean water
● Healthcare
● Gap finance
● Education
● Economic development in underserved communities
● Small business creation
For wealthy investors, impact investing offers a way to put their money to work in the causes they care about. It may also play an important role in legacy planning for families who want to create long-term, meaningful change.
What Is ESG Investing?
ESG investing is a type of socially conscious investing that considers environmental, social, and governance factors when building an investment portfolio. Many investors use ESG and impact investing interchangeably, but they are not the same thing3.
When analyzing companies for ESG investing, investors look at each of these three areas.
Environmental
How do the company’s operations impact the environment? Examples of environmental factors include carbon footprint, energy usage, water waste, and climate change mitigation.
Social
How does the company treat people? Examples of social factors include employee relations, diversity and inclusion, labor standards, and product safety.
Governance
How is the company governed? Governance factors may include board structure, executive pay, shareholder rights, and accounting transparency.
ESG data may be extremely useful for investors who want to screen companies for sustainable investing. However, ESG investing does not inherently lead to positive environmental or social impact.
Impact Investing vs. ESG Investing
Impact investing tries to produce measurable social or environmental benefits. Many ESG investors use their portfolios to screen out companies they don’t want to invest in. With impact investing, you might directly fund projects or companies that are aligned with your values.
Many impact investments are mutual funds or other investments you may buy and sell on the open market. However, there are many more ways to pursue impact investing as an asset class. You may be able to invest in private equity funds, startups, or special projects like green real estate or affordable housing developments.
Unlike traditional investments, impact investments typically provide reporting that shows you exactly how your money is making a difference.
Why Wealthy People Choose Impact Investments
Impact investing may play a variety of roles in the portfolios of wealthy investors. Families vary greatly in their values, so impact opportunities that might matter to one family might not matter as much to another.
Here are just a few reasons affluent investors choose impact investments:
Values
Building a nest egg may take years or even decades. Many families want their investments to reflect their priorities. Wealth also offers opportunities to give back and make a difference. Impact investing may be one way to ensure your investment portfolio aligns with your values.
Long-Term Focus
Impact investments often target social or environmental issues that require long-term strategies. From climate change to income inequality, many of these problems are not going away anytime soon. If your investment horizon is 20+ years, there may be overlap between your financial goals and certain impact causes you care about.
Next Generation
Children and grandchildren may have different priorities than their older family members. They might be more focused on climate change, inequality, or corporate governance. Impact investments might help start conversations about your family’s values and priorities.
An Opportunity to Diversify
Not all impact investments are equivalent, and you're not limited to public-market investments. Many high-net-worth investors use their wealth to invest in private businesses, real estate projects, and other projects they like.
While these investments may help you diversify your portfolio, they also may require longer hold periods and a tolerance for less liquidity. Be sure to do your due diligence before investing.
Finding Appropriate Impact Investments
When approached correctly, wealth creation and your investment portfolio may align with your values. Impact investing offers many opportunities for wealthy investors to allocate capital toward causes they care about. Just be sure to consider your financial goals, risk tolerance, asset allocation, liquidity needs, time horizon, and tax consequences.
Impact investments aren’t just for the ultra-wealthy. If you have the opportunity to pursue impact investing, it’s important to understand how these investments might fit into your portfolio. Work with your wealth management team to find impact investments that align with your goals. Once you find appropriate investments, you may see your impact on your favorite causes.
As wealthy investors continue to seek out new ways to allocate capital toward causes they care about, more opportunities may become available. Talk to your financial professional about impact investing opportunities that might be appropriate to consider.
Important Disclosures:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Impact Investing and Environmental Social Governance (ESG) have certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Investing in private equity and private debt is subject to significant risks and may not be suitable for all investors. These risks may include limited operating history, uncertain distributions, inconsistent valuation of the portfolio, changing interest rates, leveraging of assets, reliance on the investment advisor, potential conflicts of interest, payment of substantial fees to the investment advisor and the dealer manager, potential illiquidity and liquidation at more or less than the original amount invested.
Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower.
This article was prepared by WriterAccess.
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Footnotes:
1 ESG investing - statistics & facts
https://www.statista.com/topics/7463/esg-and-impact-investing/
2 Understanding public benefit corporations: Profit with a purpose
https://www.britannica.com/money/what-is-a-public-benefit-corporation
3 Differences Between Impact Investing and ESG Investing