Impact Investing is a growing trend for a number of reasons. One of them is to increase awareness of the environmental movement. TreeHugger, Grist, Dot Earth, EcoGeek, AutoblogGreen, Mother Nature Network – these are just a handful of the top green websites that have million of readers altogether. Today people are more informed about environmental and social issues than ever and many of them are committed to being careful about their consumer decisions to reduce negative impact and to do some good in the world.
Impact investing is exactly what these more-informed investors are doing, because as the term indicates, this investment approach focuses on supporting companies that are trying to respect the natural world and help workers be safe and healthy. In environmental terms, the effects of climate change are one of the main concerns. For an impact investor, certain breakthrough or disruptive technologies that are not fossil-fuel based would be obvious places to look for investment opportunities.
The first supporters of the electric car manufacturer Tesla would be examples of green impact investors, though some of them were probably looking first at return on investment. (Double Bottom Line was an early investor in Tesla.) Another example of this kind of investing is venture capital leader Khosla Ventures supporting energy storage start-up Liquid Metal Battery Corp.
So, what does this information have to do with individual investors who want to be impactful with their investments? It gets a little confusing because there is a new financial tool that is being touted as a potential strategy for solving societal problems called the social impact bond. The idea is that investors with very large amounts of money – like Goldman Sachs – will invest in socially beneficial programs, and if these programs are successful, an entity like a city government that started the program will pay back the investment capital and a small return. Then all parties that participated in the social experiment will be satisfied, at least in theory.
So this type of impact investing is for very large institutions with potentially huge amounts of capital, but what is the individual investor to do? First, simply starting searching online and finding out about all the different opportunities can provide a great foundation. For example, there are peer-to-peer lending platforms – also called social loans – where you can loan someone in need a specific amount of money with an agreed upon interest rate. In this case, you would be functioning like a one-person lending institution. To make your loan socially impactful, you would choose to make the loan based on funding someone whose life would benefit most from it.
Secondly, there are investment opportunities like mutual funds like those offered by Green Century Funds. These funds invest only in companies with environmentally aware policies. Companies participating in weapons manufacturing, tobacco processing, paper pulping companies or ones that chop down huge swaths of forest are not included in these types of mutual funds.
Another example of such a mutual fund is managed by Calvert Investments. You can find them by Googling socially responsible mutual funds. There is also a website called SocialFunds.com, for more examples.
The Parnassus Workplace Fund is another example, because it only invests in companies that take care of their employees. The result of treating their employees well typically is less turnover, better employee performance and steady profits.
Impact investing can take a number of different forms. Capital is often thought as a single, large source of money usually owned by a bank, investment firm or government agency. However, each individual in society has a relatively small amount of her or his own capital, that when applied together, can produce large-scale results. In a sense, we see the power of individual impact investing with crowd-sourcing websites like Kick Starter.
A number of projects on these sites are funded in small amounts by many individual supporters. The difference with impact investing is that you can be just as altruistic in your intention, but carefully research the companies you are investing in so you can also still have the chance of making some interest on your investment. One last example, although the pharmaceutical company Amgen would not be classified as a socially responsible company overall, they have created some products that definitely helped people. If you had invested just $100 in Amgen in 1988, and then sold the same stock in 2000, your investment would have grown to about $10,000.
Angie Picardo is a staff writer for NerdWallet. Her mission is to help consumers stay financially savvy, and save some money with the best savings accounts.