by Colby Kyes
If you’ve been around anyone in finance or listened to any investment news recently, you may have heard the term “impact investing.” But what is it? Simply put, impact investing is a way to make a monetary investment that will bring about positive environmental and/or social change.
In 2015, the U.N. released a list of 17 goals to address social and environmental issues.. These 17 goals are known as the Sustainable Development Goals, or SDG’s.
Traditionally, philanthropy has been seen as the best way to tackle these types of problems.But to fix these issues at the scale that is needed, relying on people to participate in charitable giving is not going to be enough..
Unlike philanthropy, impact investing promises a “return on investment” — also known in the finance world as an ROI — to those who want to make a positive impact with their money. One major investing firm, UBS, recently stated that 39% of investors globally are already using impact investing as an investment strategy. Added to this, the MSCI KLD 400 (an impact investing fund) has outperformed the S&P 500 since it was founded in 1990!
The MSCI, in blue, has an average return of almost 1% higher than the S&P 500. Image: fsi-isd.org
There are two basic types* of impact investment: community investments and alternative investments. Alternative investments are investments in non-traditional options such as stocks, bonds, and cash. Instead alternative investments can include assets such as private equity, hedge funds, commodities, cryptocurrencies, real estate, and art and other collectibles. Alternative investments within the realm of impact investing includes non-traditional assets that address pressing societal and environmental issues.
The downside to alternative investments is that you may need to be an “accredited investor” in order to participate in those investments. This means that you have earned at least $200,000 each year for the last two years, or that you have a net worth of one million dollars. They’re usually riskier investments or may have much higher minimum investments to participate. Now I don’t know about you, but I certainly don’t fall into that category. But have no fear, community investments are still an option!
Community investment can be as simple as pooling money with your neighbors to start a community garden, or it could be as large as forming or investing in a fund to provide microloans to farmers in developing nations. An example of this can be seen in the Boston Ujima Project. This project allows community members to invest in themselves and their neighbors in order to build a stronger community based on values that align with the UN’s Sustainable Development Goals! Investors also recoup a return on their investment. You do not need to be an accredited investor to participate. Ujima does have some helpful material that you can use to decide if you should invest with them, an important consideration before any major financial decision.
Of course impact investing only works if there are impactful things to invest in! Do you have a great idea that could benefit from impact investing? Share it here!
*June 2023 Update: This link is broken—the article it linked to seems to have been taken down. Additional links and explanations have been added to the article to fill in the gaps the loss of that resource left.