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Impact Investing Guide
Impact Investing is a more socially-oriented investment strategy.
It aims to balance traditional investment screens (potential for revenue growth, cash flow, asset appreciation) with values of sustainability, social inclusion and corporate governance.
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Different Types of Impact Investing
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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.
Environmental, Social & Governance (ESG) Investing
Screens investments based on these three factors (ESG)
Often prioritizes the financial return while keeping a high threshold for social impact
Limited uniform benchmarks, but ESG rubrics are available through financial research firms like MSCI that typically align with the UN Development Goals
Socially Responsible Investing (SRI)
Focus on social impact value drivers broader than just ESG and beyond a pure screen
Often prioritizes social impact over financial returns
Even fewer standardized metrics, but some guidelines available through financial research firms like MSCI that also align with UN Development Goals
Make Your Money Work
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ETFs: As we’ll cover later in this report, ETFs are the most popular and accessible way for everyday investors to get involved.
There is truly an ETF for anything these days.Asset Managers (Equities, Bonds, etc.) as of today have 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.Venture capital funds may focus exclusively on disruptive innovation that should create impact. For instance, Town Hall Ventures exclusively focus on healthcare accessibility.Private equity funds focus on hands-on operating models and often rate investments based on ESG factors or even require management teams to create and improve impact-related key performance indicators (KPIs) and goals.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.
Diversify Your Portfolio
One of the most important part of investing your personal portfolio is understanding risk and diversification.
Consider investments with varying risk.
The younger you are, the more risk and higher reward you can afford, because you can make up losses overtime.
If actively managing a portfolio isn't for you, look into an age-based or target retirement funds.
Diversify Your Portfolio
One of the most important part of investing your personal portfolio is understanding risk and diversification.
Consider investments with varying risk.
The younger you are, the more risk and higher reward you can afford, because you can make up losses overtime.
If actively managing a portfolio isn't for you, look into an age-based or target retirement funds.
Key Lessons
Stock picking is less important than diversifying your portfolio and understanding risk.
Past performance does not indicate future performance.
Always do your due diligence. Don't throw a large sum of money into the market without doing your research first.
Take Your Money Further
Read Investing Lessons and Mistakes for your Stock Portfolio.
If you like books, read The Little Book on Common Sense Investing.
Go further and download our social impact investing guide.
Learn about Tax Planning
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Proactively understanding certain tax strategies helps you plan for savings, maximize your investment returns and feel less dread during tax season!
Understanding the tax system
First of all, plan to start filing taxes well ahead of the typical April 15th deadline.
Start saving tax-related forms year-round, such as donation receipts, W-2s, 1099s, etc.Understand how the U.S. marginal tax brackets works. In general, the more money you make, the more you are taxed. We explain and provide additional reading in this post about the 2020 tax season.
Once you understand your taxed income, you can begin to look at common tax deductions. The federal, state and city governments use these deductions to incentivize certain activities, so it's fair to use them to lower your tax rate
Learn about capital gains vs. income tax.
Capital gains are typically taxed at a lower rate than ordinary income. Capital gains tax ranges from ~0-20% whereas income taxes reach 37%. Moreover, you have more control over your capital gains tax rate!
Learn more about capital gains and factor taxes into your stock trades to maximize returns!Capital gains also apply to real estate investments. There are certain tax benefits to home sales of your primary home caveats laid out here.
While you're at it, learn about mortgage interest deductions!
Make the most of your donations!
First, recall if you usually take the standard tax deduction or itemize. Your accountant or tax service should have the answer, and this impacts your tax strategy.
Understand that tax guidelines can change each year. Due to CARES Act 2020 changes, tax payers who do not itemize donations can now deduct up to $300 in donations from their federal taxes in addition to the standard deduction.
Look into Donor-Advised Funds or Impact Investing - our guide is coming soon! These strategies help you maximize impact and plan around taxes.
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