The term “impact investing” hasn’t been around a long time having been coined in 2007. It refers to investing in a way that generates a specific positive social or environmental effect in addition to creating financial gain for the investor.
Impact investing is a subset of “socially responsible investing (SRI).” SRI tries to avoid harm. Impact investing seeks to act or make a positive impact – hence the name “impact investing.”
How It Works
If you want to be an impact investor it’s up to you to consider a company’s commitment to corporate social responsibility (CSR) including how the company seeks to positively serve society. As an individual investor you are free to decide what constitutes CSR and whether a company you are considering making an investment practices CSR.
Most impact investing is done by institutional investors. However, socially conscious financial service companies and web-based investment platforms exist to serve the needs of those who want to do good works and invest at the same time.
It isn’t difficult to find corporations practicing CSR. Companies like to advertise their involvement because it’s a way to attract new investors. After all, who doesn’t want to get the double benefit of making money and feeling good about it at the same time?
Companies typically have foundations in charge of their CSR work. One company, Kellogg’s (NYSE:KC) sponsors the W.K. Kellogg Foundation whose Mission Driven Investment (MDI) arm in 2010 made a $5 million bridging loan to Wireless Generation, a provider of software to schools across North America.
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Pros And Cons
The pros and cons of impact investing are pretty much what you would think they are. On the pro side, impact investing offers you, the investor, an opportunity to practice something you believe in. If you are an environmentalist and want people to know you are literally willing to put your money where your mouth is, investing in an environmentally friendly socially responsible company certainly would do the trick. Moreover, money you invest in a socially responsible company will not be invested in a company you feel is environmentally irresponsible. Finally, your investment rewards good behavior (encouraging other companies to do the same) and gives you that positive feeling discussed above about putting your money to effective use.
There is, of course, a downside. First and foremost, emphasis on social responsibility limits your investing options. In fact, impact investing tends to concern itself more with social responsibility than financial returns. This could become painfully clear if you are trying to build a retirement nest egg and fail to reach your goals because you took potentially higher returns off the table. You could fail to take advantage of an opportunity because the company didn’t meet your CSR standard and end up losing out on a windfall. Sadly, you can’t pay the water bill with social responsibility.