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.
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. 😉
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)
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!
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.
Get in touch and we'll add your questions to our FAQs.Contact us