🌱 Impact Investing Guide 📖

In the YMP Impact Guide, we provide (i) a brief overview on Impact Investing and (ii) tangible steps to get started putting your investments towards your social values.

Impact Investing is a socially-oriented investment strategy that aims to balance traditional investment screens (potential for revenue growth, cash flow, asset appreciation) with values of sustainability, social inclusion, and corporate governance. The end goal is to make money while supporting building a better planet! 🌎

(Anna, Founder of YMP, wrote this guide based on her experience as an investment professional, including serving on her hedge fund's Impact Investing Committee. These thoughts are independently her own, and should not interpreted as investment advice.)

What is Impact Investing?

The most common form of impact investing takes the form of Environmental, Social and Governance Investing (ESG) which rates companies based on those three factors and evaluates how ESG factors may impact a company’s performance and investment returns.

On the other hand, Socially Responsible Investing (SRI) focuses on the environment and social effects of investing. This is a nuanced difference from ESG investing but places greater emphasis on social impact rather than on purely returns.

Lastly, don't judge an investment by its label! To be a truly informed consumer, learn a bit more about what the underlying investments and companies are.

Do Impact Investments Generate Better or Worse Returns?

Given the different strategies and early stages of the industry, the answer is still unclear (at least based on YMP's research). You'll hear increasingly positive answers as (1) people are eager to do good, and (2) investment firms want to raise impact funds. In theory, impact investing weeds out headline risks from companies that could see risks and long term secularly declining sectors like oil & gas.

Ultimately, Impact Investment returns for ETF and Index Fund investors should not significantly differ from the mainstream ETFs that they replace.

To show you all the different options and returns out there, we share some of the largest impact funds to date below.

Types of Impact Investing

We want to use provide you with a broader view of the Impact Investment industry, as you'll likely hear these terms in the financial news. While ETFs and Index Funds are the most common investment options for everyday people, you can keep an eye out for other industry options as you build that net worth. 😉

  1. ETFs / Index Funds: As we’ll cover later in the "Actionable Steps" part of our guide, ETFs and Index Funds are the most popular and accessible way for everyday investors to get involved. There is truly a fund for anything these days. These impact funds are considered more gradual, passive drivers for company behavior given the passive investment strategy.
  2. Asset Managers (Equities, Bonds, etc.): These different strategies will focus on screening and monitoring ESG or social impact investments. Investors will assess companies based on pre-set criteria that are defined by the fund early on.
  3. Venture Capital Funds: May focus exclusively on disruptive innovation that should create impact. For instance, Town Hall Ventures exclusively focus on healthcare accessibility and, in theory, aids innovation in healthcare that can help less-advantaged people in the future.
  4. Private Equity Funds: Focus on hands-on operations and medium-term ownership. Often rate investments based on ESG factors or even require management teams to create and improve impact-related key performance indicators (KPIs) and goals. Given the early stages of the ESG strategy, some question the social impact effectiveness of this strategy.
  5. Green Bonds or Social Impact Bonds: Green bonds are corporate debt financing issued by private or government entities for environmentally friendly projects. Social impact bonds (aka pay for success contracts) have returns directly contingent upon the effectiveness of those projects over agreed-upon metrics.
    For instance, one of the earliest social impact bonds was the Peterborough Prison Social Impact Bond (2011) which measured returns directly related to the improvement in relapse rates.

The issue we at Young Money Plans take with “impact investing” is that it is often oversold the same way that greenwashing has flooded consumer products. Most people don’t take the time to investigate their investment options. While we appreciate any effort to do good, we encourage staying informed to avoid falling for "greenwashing" in personal finance. That's why we felt the need to create this report! ✨

♻️ Green Bond Case Study ♻️: Verizon issued its first green bond in 2019 to much fanfare and support, but upon looking at the actual bond legal documentation, we note that Verizon is allowed to count any green investments from 2017-2029 into its $1 billion bond target. Beyond that, “green investments” include normal daily activities for Verizon, including 5G wireless deployment and legacy network upgrades, which Verizon was bound to invest in regardless. 

In theory Verizon’s investments will support greater access to the internet and help build smarter, more innovative cities, but we believe the title “green bond” can be misleading. Verizon benefits from the green label with a substantial discount to its usual cost of financing. (Read more)

How to Invest with Impact

Let's get you started on Impact Investing! 🏁

We want to highlight a few tangible switches and investment options for your investment portfolio. We can make this switches to (1) put our dollars to use investing in more impactful businesses and (2) supporting demand for Impact Investment options, which are still fledgling in the financial sphere.

Similar to switching to reusable water bottles or reducing plastic use, we can make these small shifts in our financial investments to put our money where our mouth is!

Options as an Everyday Consumer
For most everyday investors with personal savings, the lowest-cost and most accessible options for impact investing are to (1) pick impactful ETFs and Index Funds, (2) outsource to roboadvisors who sell or repackage impact-related offerings (almost all of them do these days), or (3) hand-pick your own investments more carefully.

In these Index Funds, it is often up to the discretion of a real human professional investor to rate and review companies for impact. This is important to note, because whether an investment is “impactful enough” will depend on the reviewer.

Common Market Index Alternatives
Since the S&P Index and diversified U.S. or Global indices are the most common and most diversified investments and typically come with lower expense ratios (percent of fees that you pay out of the total $ amount you invest), we want to provide a few socially-impactful alternatives. We include additional more active investment options (with higher fees) too, if you're seeking greater impact!

  1. S&P Index ex. Fossil Fuels (SPYX)
    Simple option for investors who want to balance some impact without too much unpredictability with returns. However, the expense ratio is on the higher end (0.25% compared to SPY expense ratio of 0.09%).
  2. Vanguard ESG US Stock ETF (ESGV)
    ~1,500 stocks in the U.S. screening for industries and companies that do not meet the U.N. Global Compact principles or diversity criteria. Expense ratio of 0.12%
  3. Vanguard ESG International Stock ETF (VSGX)
    Global ex. U.S. Passive ETF (with lower expense ratio of 0.17%) that invests in large, mid and small cap international stocks, screened for ESG criteria and avoids industries including fossil fuels, gambling, alcohol, tobacco, etc. Tracks the FTSE Global All Cap ex. U.S. Choice Index.
  4. Vanguard FTSE Social Index Fund (VFTAX)
    Passive mutual fund (expense ratio of 0.14%) that replicates the FTSE4Good US Select Index. Includes large and mid cap U.S. stocks screened for ESG and excluding industries including fossil fuels, gambling, nuclear power, alcohol, etc.
  5. Fidelity U.S. Sustainability Index Fund (FITLX)
    Mutual fund with low expense ratio of 0.11% that corresponds with the MSCI USA ESG Index of large- to mid-capitalization companies that rank highly in ESG factors.
  6. Fidelity International Sustainability Index Fund (FNIDX)
    An international version of the sustainability index fund that tracks the MSCI All Country World Index (ACWI) ex. USA ESG Index with large- and mid-cap international companies in both developed and emerging markets. Expense ratio of 0.20%.
  7. Fidelity Water Sustainability Fund (FLOWX)
    Mutual fund with a higher expense ratio of 1%, but a more active and focused investment strategy. Invests in companies helping to deliver safe, reliable, and easily accessible water.

Index Options for Vanguard, Fidelity and More

More Investment Options to Consider
If you're looking for even more specific options for impact, we got you!
We've sorted out ~28 of the top funds related to social impact. For additional details, look up the ETF and dig into what companies the fund invests in.
Happy investing!

More on Social Impact


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