Social impact investing: Making a difference with your money

Your investment decisions may help make the world a better place. With social impact investing, you can put your money toward ventures that align with your values, from sustainable energy to empowering marginalized entrepreneurs.

Traditionally, institutions have been the leading proponents of social impact investing. But individuals hoping to make a positive difference have increasingly adopted socially or environmentally conscious investment strategies. Read on to learn whether social impact investing may be the right approach for you.

What is social impact investing?

Social impact investing is often used to describe various values-driven investment strategies, but it technically refers to one specific approach. Social impact investing means investing only in businesses that have a measurable impact on social or environmental issues. This approach focuses on what a company does, not how it operates. An example of social impact investing might be buying shares of a start-up developing technology to improve rural food systems.

Social impact investment doesn’t mean sacrificing your returns – the goal is to help the world as you make money.

Some people also use the term “social impact investing” interchangeably with other similar investment strategies:

Environmental, social, and governance investing

Environmental, social, and governance investing (ESG investing) focuses on a business’s operations. This approach measures a company’s dedication to upholding ethical, environmental, and social standards. ESG investing also considers a company’s governance, which means the behaviors of the board and leadership team matter. Suppose you’re taking an ESG investing approach. In that case, you might buy shares in a company that has eliminated plastic waste in its production process, which shows a commitment to environmental sustainability.

Socially responsible investing

Socially responsible investing (SRI) differs slightly from both social impact and ESG investing in that it’s an exclusionary approach. That means an investor practicing SRI actively avoids companies that fail to fit certain standards. Those standards depend on specific values. For example, an SRI approach might mean refusing to invest in the fossil fuel or defense industries because those businesses inherently clash with your values. SRI investing doesn’t usually involve seeking out companies specifically because of their positive impacts.

Pros and cons of social impact investing

Like any investment strategy, social impact investing has advantages and disadvantages. Consider whether the following pros and cons align with your goals, risk tolerance, and interests.

Pros

• Investments encourage innovative solutions in sustainability, healthcare, infrastructure, and more.
• You can align your financial strategy with your values.
• Social impact investment offers opportunities for significant returns in ground-breaking markets.

Cons

• Imperfect metrics for identifying positive impact could leave you disappointed in a business’s outcomes.
• Your pool of potential investments may be limited.
• You might have slower or lower returns than other investments, depending on the circumstances.

How to get started

To begin social impact investing, try to identify the issue areas that are closest to your heart. Do you want to make a positive difference in solar energy? Cancer research? Social equality? Fortunately, you have plenty of options.

Once you’ve determined the causes you want to center your strategy around, you can begin building your portfolio. You may conduct research on your own or work with a financial advisor to identify mutual funds and investments. With your values in mind, you can build an effective investment portfolio that makes a positive impact.