Impact Investing as a Philanthropic Career
Impact investing has become an area of great interest among donors, venture capitalists and investors across the globe. In the United States alone, environmental, social and governance investing (ESG) accounted for $12 trillion of assets. According to a report from the Forum for Sustainable and Responsible Investment, climate change was the most prominent asset.
However, philanthropists and socially-minded entrepreneurs are focused on how they can make an impact as a year-round career. Impact investors and philanthropists supply capital to generate social and economic improvements that also provide monetary returns. It offers an alternative to philanthropists who believe there is more than a binary decision to simply invest for profit and give money to social causes. While grantmaking can withstand market failures, impact investment leverage market power to bring about needed change.
A Growing Demand for Impact Investors
As the field evolves and ESG performance criteria gain popularity with investors, it’s becoming more widely accepted that impact portfolios can often meet or exceed a broad market performance on a risk-adjusted and absolute basis. A growing awareness driven by the impact of large-scale challenges — including social issues like diversity and gender equality and good corporate citizenship — has triggered an influx of investor demands for ESG strategies and a series of products that meet the needs of diverse communities.
This new awareness, its metrics and a lexicon of new terms can often seem daunting. However, starting a career in impact investing can be straightforward. It begins with knowing what you already own, keeping track and prioritizing what issues you care about most. Investors should work with advisors who have expertise with sourcing, evaluating and measuring resources to uncover other impact opportunities, while helping their clients navigate their options and find comfort in ESG priorities. Finding a connection between investments and philanthropy provides influential opportunities to add value and strengthen relationships with the community. Impact investing shouldn’t be thought of as a strategy as much as a purposeful, civic-minded mentality. The process can be incremental to increase the alignment of the investors’ values and the impact potential to evolve the overall goal.
Investing in Action
Impact investing is a broad term and anyone from a microfinance investor to a green tech entrepreneur can get involved in the movement. Whether you’re an impact-first investor or a financial first investor wishing to expand upon the ethical practices of your assets, there are several tools at your disposal. Here are five crucial steps to consider before starting a career in impact investing:
Take Inventory of your Portfolio
The first step is to examine all the assets you own and divest from those that don’t align with your values and intent. “Negative screens” can be applied to a portfolio to identify how poor investments in your portfolio may be exacerbating a problem you seek to solve through social impact. For example, REITs that buy properties will have the goal to increase returns through upgrades and raising rents. While these securities may offer financial benefits for the investor, they should not be in the portfolio of an investor who seeks to increase access to affordable housing.
Develop a Theory of Change
Allocating funds with broad ESG goals can help to avoid over-investing in any one sector. Still, an impact portfolio should reflect the desired outcomes and priorities based on carefully considered causes and themes. ESG includes a broad spectrum of issues, but a scattered approach limits impact. It’s suggested that impact investors optimize their portfolios by investing across asset classes and the risk spectrum. By allocating to fund managers with different investment styles, it can help diversify your portfolio where needed, and provide insight into where you can pull back to have a few central focuses.
Measure and Improve your Impact
To measure your social impact, utilize trusted external resources that collect and analyze impact data. However, it’s not always an easy task as there are often inconsistencies in how companies report ESG metrics. To help achieve lasting impact with publicly traded companies, consider third-party organizations that connect like-minded investors to promote their interests to company managers. Additionally, voting proxies and co-filing corporate resolutions can help both parties stay aligned on the topics and missions they both care about.
Adapt your Strategy over Time
There is no final step to creating an impact portfolio; no one can know how the investing journey will play out. Risk/return profiles change based on life events and age, but so do priorities and motivations for effecting change and producing public benefits. An investors’ portfolios and reporting should always adapt accordingly, so you can effectively measure financial returns and also the progress and ongoing performance of investments.
Ensure your Portfolio is Aligned with Your Values
It’s also important to apply “positive screens” to balance and build a portfolio towards investments that align with intent and charitable preferences. Charitable donations are often used as a good indicator for finding social values and can lead the way to investments that leverage giving. For instance, say you already donate to nonprofit advocacy groups focused on affordable housing. Bonds issued to develop affordable housing with green, energy-efficient features that lower utility costs for residents supports a complementary impact investment focus.
It’s no surprise that more people are becoming interested in impact investing and its philanthropic benefits as a long-term career. It offers an alternative that goes beyond traditional grantmaking and leverages the power of a market to create lasting change. Ideally, impact investors will remain engaged investors and consider how to leverage their portfolios in ways that advance the legacy they seek to create. By using these guidelines as a resource, impact investors can be well on their way to helping the world become a better place for everyone.