Impact Investing: How to Make a Difference With Your Investments

Traditional wisdom says that public sector and private sector goals — to make an impact in the world and to maximize profit, respectively — are mutually exclusive.

But a growing cadre of investors are challenging that dichotomy via impact investing, which allows you to invest for profit and social/environmental impact. In other words, you can have your cake and eat it too.

Why is this type of investing growing in popularity? A few reasons:

1. An emergent middle class in developing countries creates investment opportunity. Those emerging from poverty need products and services.
2. There is a growing demand to protect our natural resources — virgin land, clean water — and lower our overall carbon footprint.
3. There is a growing belief that philanthropy isn’t enough and it’s not the right resource in all cases.

These trends create opportunities to invest in your community; provide financial services for those at the bottom of the pyramid; support sustainable agriculture (including small farms and sustainable farming practices); encourage clean technology development; and contribute to alternative energy research.

There’s no one way to approach impact investing — consider these approaches for a personal fit.

Impact First: This means that the social or environmental returns are more important to you than financial returns. Kiva, a micro-lending firm that supports entrepreneurs around the world, is probably the most well-known example of this type of investment. You lend money to causes at a zero-percent interest rate, which means you get your money back but don’t earn anything on the loan — although, an impact first investment doesn’t necessarily mean no return.

Financial First: This means that you will only accept a market rate of financial return and will only consider investments that deliver minimum levels of impact. Increasingly, impact private debt and equity funds operate as financial-first impact investments. You can find out more about impact managers with the ImpactAssets 50.

Blended Value: Do neither of the more extreme options sound like you? You’ll want to consider both the financial returns and the social or environmental impact and weigh them in balance. Many impact investments fall into this category.  

Beth Stelluto is a member of the DailyWorth Connect program. Read more about the program here.

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