If you’re passionate about social impact and asking what you can do beyond making charitable gifts and volunteering, there’s a world of opportunity. The capital you invest for positive financial returns can also generate positive social returns, amplifying the mark you can make.
Whether you care about climate, medical innovation, women’s rights, economic prosperity or something else, there is likely an impact investment that would complement and enhance your philanthropy. The number of people making impact investments has grown significantly over the past 10 years, topping $1 trillion worldwide, according to the GIIN (Global Impact Investing Network).
In simple terms, an impact investment aims to deliver both positive, measurable social and environmental impact and a financial return. Increasingly, impact investing opportunities have grown in number and popularity across asset classes and strategies. What once was a more niche tool has gone fully mainstream, offering opportunities for the “impact curious” as well as seasoned impact investors.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What’s more, you can make these investments out of your profit-generating investment accounts or charitable assets — a donor-advised fund (DAF) or the corpus of a foundation — ensuring that all your assets are working toward positive social impact.
Here are five essential ways to approach impact investing:
1. Seek clarity on risks and rewards.
As with any wise investment, know what you’re getting yourself into. Ask yourself: Is this a solid investment, not only for me but for all parties to the transaction? Can I afford to lose this capital? If the investment fails, what are the consequences? And ensure you are also clear about the kind of social or environmental impact the investment is likely to have.
Ask yourself: How significant is that impact? To what extent might there be some trade-off between social impact and financial returns? How ready am I to accept that trade-off?
Some impact investors may choose to accept some below-market-rate returns in exchange for a greater social impact, but most are seeking competitive market-rate returns and are increasingly seeing their expectations met.
2. Know what you own.
This is perhaps the most important mantra for investors, particularly impact investors. Every investment in a company or fund inherently has an impact — whether through the type of goods a company creates, the practices of its board and management, the nature of its supply chain or how it treats employees. The question every investor can consider is whether that impact aligns with their personal values, aspirations or charitable goals.
If you have a charitable foundation or fund that makes grants to combat climate change, for example, are your investments undermining that work? Take a close look at your portfolio. You may be surprised by what you find — good or bad.
3. Widen your aperture.
People often conflate impact investments with ESG. While managing a stock portfolio full of publicly traded companies reporting positive environmental, social and governance metrics is one type of impact investing, there are other direct investments with different types of impact profiles, time horizons or liquidity.
You can help a nonprofit, or other enterprise that meets your values, to bridge a cash flow gap by making a loan on mutually reasonable terms. There’s a burgeoning field of impact-oriented venture capital, helping to finance early-stage social enterprises that focus on a host of impactful issues ranging from healthy food products to remote health care tech to employing people left out of the traditional job market.
In addition, some impact investors offer guarantees that involve them essentially co-signing a loan (or group of loans) to de-risk the transaction, thereby reducing the interest rate or allowing the borrower to qualify for the loan.
4. Listen.
Ask the people doing the work what they need and what would be most helpful to them. They may have a better sense of what will generate a real impact than investors who are more distant from the issue.
For example, if you care about workforce development for youth in low-income neighborhoods, it may be that providing loan guarantees for the purchase of a community training center may dramatically accelerate a workforce development organization’s sustainability and scale. That might even have a greater long-term impact than a charitable donation.
5. Don’t set it and forget it.
Being an impact investor means tracking progress. Financial returns are often easier to calculate than social good. What are the social or environmental impacts you seek? What is the mechanism you are using to measure progress? The field of impact measurement is still evolving, but starting with even a simple set of impact goals and regularly checking in on their progress can make all the difference.
For those who want to take their measurement to the next level, the Impact Management Project has set informative guidelines for measurement, utilizing standards including the U.N. Sustainable Development Goals and the IRIS+ system of the GIIN in order to track impact systematically.
As you explore impact investing, there is a wide range of resources to help you deepen your understanding, find like-minded peers to share ideas and address challenges or find investable opportunities. If you’re interested in testing the impact investing waters, now’s a great time to dive right in.
About Catherine Crystal Foster: Catherine is vice president of the Rockefeller Philanthropy Advisors (RPA) Advisory team. In her role, she provides strategic guidance across program areas for families, foundations, and corporations to accelerate social impact. Prior to joining RPA, she served as CEO and co-founder of Magnify Community, where she worked with Silicon Valley philanthropists to make bold and catalytic investments in the community. Catherine has led and advised philanthropic and nonprofit organizations for more than 20 years.
About Patrick Briaud: As a Principal at RPA, Patrick helps individuals, foundations and corporations use a range of assets to achieve their social impact goals. He works closely with institutional funders to make strategic shifts in order to best steward their resources and confidently deploy capital to achieve their impact goals. As lead for RPA’s Impact Investing Practice, Patrick supports mission-driven asset-owners to build investment strategies aligned to their individual values or organizational mission. This support includes education and consensus building, Investment Policy Statement development, operating plan implementation and full-service outsourcing of Program Related Investments.
Related Content
- How to Assess the Impact of Your Charitable Giving
- What to Do if Your Passion for Charitable Giving Has Flagged
- Considering Donating to Charity? Here’s a Road Map to Steer Your Choices
- How to Maximize Your Impact With Strategic Philanthropy Tools
- In Philanthropy, Gen Z and Millennials Do It Their Way
-
I missed the 2-Year IRMAA Rule. Now, my Medicare costs are skyrocketing. What are my options?A spike in income could result in costly IRMAA charges on your Medicare premiums. We ask financial planning experts for advice.
-
How to Build Your Financial Legacy Three Piggy Banks at a TimeA wealth adviser shares a childhood saving technique that taught him lessons of stewardship, generosity and responsibility and helped him answer the question we all need to answer to define our lives by impact rather than greed: 'What is this all for?'
-
How to Build Your Financial Legacy Three Piggy Banks at a Time
A wealth adviser shares a childhood saving technique that taught him lessons of stewardship, generosity and responsibility and helped him answer the question we all need to answer to define our lives by impact rather than greed: 'What is this all for?'
-
Which of These Four Withdrawal Strategies Is Right for You?Your retirement savings may need to last 30 years or more, so don't pick a withdrawal strategy without considering all the options. Here are four to explore.
-
DST Exit Strategies: An Expert Guide to What Happens When the Trust SellsUnderstanding the endgame: How Delaware statutory trust dispositions work, what investors can expect and why the exit is probably more important than the entrance.
-
Think Selling Your Home 'As Is' Means You'll Have No Worries? Think AgainThere are significant risks and legal obligations involved in selling a home 'as is' and by yourself, without a real estate agent.
-
What the OBBB Means for Social Security Taxes and Your Retirement: A Wealth Adviser's GuideFor Americans in lower- and middle-income tax brackets, the enhanced deduction for older people reduces taxable income, shielding most of their Social Security benefits from being taxed.
-
Financial Planner vs Investment Manager: Who's the Better Value for You?When markets are shaky, who do you trust with your money? A recent study provides useful insights into the value that different financial professionals offer.
-
I'm a Financial Adviser: This Is How You Could Be Leaving Six Figures in Social Security on the TableClaiming Social Security is about more than filing paperwork and expecting a check. When you do it and how you do it have huge financial implications that last the rest of your life.
-
The Big Pause: Why Are So Many Americans Afraid to Retire?While new research sheds light on Americans' growing reluctance to quit work in later life, can anything be done to help those with the retirement jitters?
