Most Americans know at least the basics of investing: acquiring an asset or a resource with the goal of having the asset appreciate over time. You may invest to plan for retirement, for your children’s college tuition—or for future philanthropy.
Impact investing is a strategy by which capital is leveraged in ways that are designed to achieve positive social or environmental change while also generating a financial return for the investor. The availability of impact investing has challenged the traditional view that social and environmental issues should only be addressed by philanthropic donations, while market investments should exclusively focus on generating financial returns. By providing capital to address the world’s pressing challenges, impact investments can achieve both charitable and financial goals.
There are many different options for impact investing. Impact investments can be made in both emerging and developed markets. Moreover, investors who participate in this strategy can target a range of returns based on their goals and interests, whether that means creating jobs or supporting the development of renewable energy.
The global market for impact investment is growing; it was assessed at roughly $1.2 trillion late in 2022 and is projected to reach $6 trillion by 2031. And a new generation of investors are leading the charge toward growth, with more than 60% of Millennial investors saying they already participate in impact investing, citing their belief that the strategy can generate more sustainable returns.
As social and environmental issues prove themselves to be in need of complex solutions, impact investments could prove an effective path forward for a growing population of people who plan to use their wealth for positive change.
The combined pursuit can be very attractive to mission-driven investors—such as DAF donors. When you open a donor-advised fund (DAF), you have the option to recommend an investment strategy for the assets in your DAF with the aim of increasing the DAF balance over time for grantmaking. And for DAF donors who have a strong sense of the causes they wish to support, impact investing could offer the chance to have an even greater charitable effect.
Below is a closer look at some of the ways investors can advance their values using the strategies above, and an explanation of how impact investing carries the work of positive change even further.
Environmental, social and governance investing—referred to as “ESG”—is a practice that screens investments through a set of standards that ensure capital is going toward companies with sound business practices. In ESG investing, financial returns are still the primary objective; companies are evaluated with respect to the money they stand to gain by acting on ESG-related opportunities, and how their response will affect their market performance.
An ESG fund applies its criteria to mitigate long-term risk and increase long-term returns. Environmental standards, for instance, measure whether a company is a good environmental steward. Social criteria measure the way a company manages relationships with its employees, customers, suppliers and the community where it operates. Governance looks at a company’s board, executive team, shareholder rights and other internal issues. Many investors consider ESG factors as a key component of fundamental analysis with the potential to drive outsized financial performance.
Socially Responsible Investing (SRI) is practice that uses strictly ethical guidelines to eliminate or select investments based on adherence to values-based standards. The specific ethical guidelines an investor may use to select investment opportunities may be religious or political in nature. This type of investing is also referred to as sustainable, values-based or ethical investing.
For instance, a socially responsible mutual fund may screen out all companies that are engaged in weapons contracting, tobacco or gambling. It may also incorporate positive screens—such as including companies that have a strong track record on reducing greenhouse gas emissions or that have a gender-diverse leadership team and board of directors. For clients interested in socially responsible investing, the goal is to generate financial returns without violating certain principles.
Impact investing is increasingly used as a catchall term for values-aligned investments, of which ESG and SRI are a part. However, what sets impact investing apart as a strategy from ESG or SRI is that it explicitly aims to achieve measurable social or environmental outcomes, rather than simply investing in income-generating opportunities that have proven to have done no harm to those outcomes.
Impact investing spans a wide range of assets, including bonds, private equity and public equity. Impact investments often require a time commitment in order to achieve demonstrable social outcomes, which can be difficult for clients who regularly use their philanthropic dollars to recommend grants from their accounts. However, a variety of cash and fixed asset products are also available within impact investing.
Examples of Impact Investing
Clean Energy
As of 2022, technology giant Apple had announced that the majority of its direct supplier spend was now invested in individual suppliers who had committed to using 100 percent renewable energy for their Apple business.
Equity and Transparency
Calvert, the manager of the Calvert US Large Cap Core Responsible Index, has urged the top 100 U.S. companies engaging with the fund to disclose their diversity and pay equity data, resulting in 99% of those companies agreeing to make public their Equal Employment Opportunity reports.
Why Impact Investing?
By opening a DAF, you have already created the opportunity to invest assets toward charitable ends. And if you already have a strong sense of your giving goals, impact investing is a way to ensure that your charitable assets are working toward those goals in values-aligned ways. By engaging with an impact investment strategy, you can mobilize your DAF assets toward measurable impact even before you commit to a grant—and with competitive financial returns, you may be able to make even larger grants down the line. Determining which impact investment strategies are right for a particular donor at a particular time is contingent on a number of factors. A strategy’s fit may depend on the donor’s philanthropic goals, risk tolerance, or projected time horizons in which they hope to see measurable results.
Philanthropic Goals
- What do you hope to achieve with your giving?
- What organizations are operating in ways that might align with those goals, and how can you best support them?
Risk Tolerance
- What is your tolerance for the risk that you may not get exactly what you hope to achieve?
- Are you more likely to take risks with your investments, or with the kinds of programs and projects you plan to support?
Time Horizons
- How long are you willing to wait before you see returns on your philanthropic investment?
- At what stage are you hoping to make your charitable intervention? Are you hoping to provide immediate support for the causes you care about, or investing in long-term change?
The Benefits of Impact Investing
- Promoting values-aligned corporate practices. By supporting companies that operate under a set of social/environmental standards, an investor can encourage broader use of these governance practices.
- Supporting sustainable approaches to addressing societal issues. By putting capital in the hands of organizations poised to make positive change, investors can support not only the short-term achievement of these goals but also the discovery of replicable—and potentially profitable—ways to make a difference.
- Re-investing returns for further positive change. Every impact investment is designed to include financial return as part of its ultimate goal. A DAF donor participating in impact investment can use financial returns to make grants to nonprofit organizations working in a mission-driven way, or can continue to invest in promising values-aligned companies and capital funds.
The Challenges of Impact Investing
- Potential risk. Certain impact investments can carry greater risk than traditional market investments. Donors should weigh their risk tolerance before getting involved.
- Alignment issues. Donors seeking a cause to support may not be able to find an impact investment that aligns perfectly with their personal charitable goals, which may cause frustration.
- Lack of common awareness. The field of impact investing is growing but still new, which means that some financial advisors lack the expertise to guide their clients through impact investing opportunities. Still, an emerging field of advisors are focusing on blending investment strategy with philanthropic impact. With the guidance of charitable experts like those at NPT, a donor may be able to access the resources they need to get started.
How to Get Started with Impact Investing
1
Determine your area of impact.
Start to narrow down the investment opportunities that make sense for you. You may wish to align opportunities directly with your giving goals—such as clean energy investments if your philanthropic focus is on the environment—or complementary, such as selecting investments aiming to broaden economic opportunity and keeping your grantmaking focused on the environment.
Start to narrow down the investment opportunities that make sense for you. You may wish to align opportunities directly with your giving goals—such as clean energy investments if your philanthropic focus is on the environment—or complementary, such as selecting investments aiming to broaden economic opportunity and keeping your grantmaking focused on the environment.
2
Involve your financial advisor.
Your financial advisor will have a holistic view of your financial position, and may be able to offer guidance on which opportunities fit within your suggested risk tolerance. With sufficient capital, you may be able to work with your financial advisor to design a bespoke portfolio.
3
Select impact investments that are best aligned with your goals.
Once you’ve put together a list of feasible opportunities, and a set of expectations and guidelines developed either alone or in collaboration with your financial advisor, you can choose the options that best fit your timeline and are best positioned to achieve your vision.
If donors need assistance with their impact investing strategy, NPT offers a variety of philanthropic consulting services to help. Learn more about impact investing at NPT.
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