Today, publicly traded corporations focus on increasing shareholder value, and that often means polluting in the name of earning you dividends.
Of course, you want to grow your retirement fund and earn a return on your investments. But with the U.S. economy standing to lose .7% of its GDP for every 1 degree Fahrenheit the average temperature rises, it can seem crazy for publicly traded corporations to ignore climate risks.
OK, so you may not be able to march into a shareholder meeting and demand the offending corporation overhaul its supply chain and offset all its carbon, but you can send a signal that you value more than just the bottom line, by engaging in impact investing.
What Is Impact Investing?
Impact investing is when you place a portion or all of your investment capital into funds that are trying to make a positive social or environmental impact, and (most of the time) a solid financial return as well.
A relatively new practice (the term was coined in 2007) impact investing shouldn’t be confused with socially responsible or negative investing, in which you exclude certain types of investments, like alcohol, cigarettes, weapons, or prisons. In impact investing, you’re not just trying to avoid investments that conflict with your values (i.e. no oil), you’re trying to advance a set of values (more solar and wind).
It’s also different than microfinance, in which loans are given to small business owners in developing countries. The type of money we’re talking about is much bigger: think an entire organic food brand, instead of one farmer.
This new concept is growing quickly. According to the Global Impact Investing Network (GIIN), a nonprofit founded in 2009 by the Rockefeller Foundation, the 209 leading impact investment organizations have nearly $114 billion in assets under management.
What Your Investments Have to Do With Climate Change
Energy projects are the second most popular type of impact investment for these funds, after housing, at $19 billion. Still, that’s just a drop of the estimated $13.5 trillion investment needed in energy projects in order to meet the international climate goals set out in the Paris climate agreement. We had better get on it.
An important facet of impact investing is that the positive impact is quantifiable and can be tracked to determine whether the enterprise is performing well when it comes to the cause you’re interested in. GIIN has a measure called IRIS, which includes nearly 500 different metrics that a fund can choose from to advertise to its investors. Other funds measure their impact against the UN’s Sustainable Development Goals.
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Does Impact Investing Cost You Money?
OK, but will you actually earn money doing this? As with any investment, there is always risk. And some impact investors are actually OK with returns that are below market rate, or even merely preserve their capital, as long as the fund effectively advances the cause. (That’s still a smarter financial decision than overpaying for “eco-friendly” consumer products with dubious sustainability cred.)
But most impact investors (60%, according to a GIIN survey) are very much trying to get a tidy return on top of changing the world.
In a Q4 2016 benchmark report by Cambridge Associates of 66 impact investment funds that aim to match or beat market returns, their 15-year returns (5.8%) were equal to global market returns, and about a point lower than the S&P 500. In fact, over the past quarter, year, 3-year, 5-year, and 10-year indicators, impact investment funds tended to perform at the middle of the pack.
And unlike a few other markets (emerging, government credit/bond, global markets excluding the U.S.) these impact investments have never gone in the negative, indicating that they might not make you fabulously wealthy, but they seem, so far, to be a solid way to do good by investing well.
How an Individual Investor Can Fight Climate Change
This kind of investing is often pitched to NGOs, religious organizations, family foundations, and high net worth individuals who have the resources to commit a significant amount to these tailored investment vehicles, plus pay a wealth manager to select the investments and track their performance. But if you don’t happen to have a foundation with your family’s last name appended, can you get involved, too?
Absolutely. Tell your financial advisor to check out Impact Base, a global online directory of impact investment vehicles. (It’s only open to accredited investors at the moment.) In conventional fund research tools, filter for mutual funds and ETFs that have environmental goals at the core of their prospectus and a high environmental rating.
Look for publicly traded companies that report on their environmental performance alongside their financial performance, or seek out investments that are directly related to climate change, such as renewable energy projects, sustainable timber companies, or tech companies that seek to disrupt business as usual.
You can also look for municipal bonds that are directed to helping a city decrease their reliance on dirty coal, or fund a solar panel program. After all, after Trump indicated the U.S. would pull out of the Paris climate agreement, a large group of cities reaffirmed their commitment to meeting the goals, and you could help by investing in projects that help cities get there. And in May, Green Century Capital Management, Trillium Asset Management, and the climate change non-profit 350.org released a guide for individual investors on how to divest from fossil fuels and reinvest in clean energy.
You can download that here. As it turns out, you don’t need to feel guilty about not being a perfectly sustainable citizen. If you commit even part of your portfolio to easing the world’s transition to a clean economy, consider it your own personal carbon offset.
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