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7 Steps to Engage in Impact Investing

by Mason Robinson
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Impact investing, the strategic arm of values-based investing, is taking hold on Wall Street.

Some money managers define impact investing as a strategic initiative targeted by private investment, but that’s not entirely accurate.

More recently, investors of all stripes have merged impact investing into environmental, social, and governance-based, or ESG, investing. They do so by measuring investment performance along with societal outcomes, such as improvements in climate change, accessible health care and racial equity.

Consequently, the ESG and impact investing realm is more largely and accurately defined as investing with the intention to generate a positive, measurable social and environmental impact alongside a financial return, according to the Global Impact Investing Network’s (GIIN) recent “Sizing the Impact Investing Market” study.

Doing so has moved impact investing into the big money game, as the size of the global impact investment market stood at $1.16 trillion in assets under management in 2022, according to GIIN.

What does that mean for the everyday investor who wants to leverage impact investing to “do good by doing well,” but also wants to post regular financial gains in their own investment portfolios?

In a few words, it means figuring out how to optimize the impact investing experience by selecting stocks, bonds, funds and community bank funding initiatives that prioritize ethics as much as they do profits.

How to Become an Impact Investor

With impact investing, your investments need to have a real-world impact and they need to make money – not an easy accomplishment in a still-nascent sector.

That process becomes easier, however, with the deployment of these seven steps to engage in impact investing:

  1. Deploy the “three i’s” of impact investing.
  2. Separate the doers from the talkers.
  3. Match your investments with your personal values.
  4. Don’t bite off more than you can chew.
  5. Start screening funds. 
  6. Leverage banks and credit unions. 
  7. Make and adhere to a checklist.

Deploy the “Three I’s” of Impact Investing

Morgan Stanley, which manages more than $70 billion in ESG investments worldwide, asks its clients to establish a framework for impact investment decision-making by adhering to the “three I’s”: intentionality, influence and inclusion.

Intentionality. According to Morgan Stanley, “intentionality” means exactly what it implies – curbing investments in companies you deem objectionable and boosting your investment dollars in companies that have an established track record of sustainability.

Influence. The investment giant also places a big priority on “influence,” meaning investors act as difference makers in the companies where they invest. For example, that could mean an impact investor becoming an active shareholder who speaks out on a company’s ESG record and advocates for change, when and where it is needed.

Inclusion. Morgan Stanley impact investors are encouraged to weigh diversity levels at the companies where they steer their assets, including the diversity level at the asset management firms that manage their money.

Separate the Doers From the Talkers

Morgan Stanley also encourages its impact investors to do their homework and identify asset managers that have prioritized ESG on a sustainable basis, versus managers who talk a good impact investing game but don’t show verified results.

To help clients successfully gauge the impact money management firms have in the ESG sector, Morgan Stanley offers its investors a sustainable investing “signal tool” that measures an asset manager’s sector performance. Many investment management companies offer similar tools that weigh a manager’s “real world” impact on investment performance.

Match Your Investments With Your Personal Values

Not every impact investor has the same set of standards and the same industry focal points. That’s understandable, given the vast expanse of the impact investment market in 2023.

In other words, it’s OK to tailor your ESG investments to your personal tastes.

How can you check that item off your list? One effective method is to check your charitable contributions over the years and steer your impact investment dollars into areas you’ve historically favored.

For instance, if you’ve given money to climate change initiatives over the years, you may be more inclined to push your dollars into companies that make solar panels or into funds that favor electric vehicles and that steer away from fossil fuels. Or, if you’re against processed foods and chemical farming, you may opt to invest in organic food manufacturers.

After all, there’s a reason why the past really is prologue, and that’s the case in the ESG market. What you’ve already accomplished with your personal charitable donations can be a great launching point into impact investing.

Don’t Bite Off More Than You Can Chew 

Like any new investment endeavor, it’s usually a good idea to ease into the ESG market and cap your initial investment at 5% to 10% of your total investable assets, or even less.

That way you can start small and boost your impact investments gradually, so you learn more about the sustainable investment market, get to know the stocks, bonds and funds that meet your unique needs, and most of all, avoid any big portfolio losses stemming from rushed and under-researched impact investments.

Start Screening Funds

As you become more familiar and more confident with impact investing, team up with your financial advisor (more advisable) or take the task up yourself (less advisable) and begin vetting some ESG funds.

Doing so can weed out the impact investment funds you want to avoid (say, eliminating funds that invest in oil and gas companies if you’re committed to clean energy, or deep-sixing funds with exposure to tobacco stocks if you’re anti-smoking).

Most fund-ranking services like Morningstar and Lipper offer digital fund-ranking platforms that can accommodate some deep ESG fund research. If you’re working with a financial advisor, it’s highly likely he or she has access to advanced impact investing fund research and can be a big help in that department.

Leverage Banks and Credit Unions

Impact investors may have more paths to portfolio expansion than they may realize.

Take community development financial institutions, or CDFIs, which steer financial assets to needy communities in certain areas, usually rural locales, Native American communities or urban areas. CDFI investments involve commercial real estate, micro-businesses and nonprofits, among other investment targets.

Tracking CDFI funds can be a great way to engage directly in impact investing, and it’s easily done. Just join a CDFI-affiliated bank or credit union, and direct the financial institution to invest your funds in communities and businesses that need the capital and have shown they can provide a good return on that financial institution’s investments.

Make and Adhere to a Checklist

Any successful impact investor has a checklist that outlines strategies and goals for a comprehensive impact investing campaign. These items should be at the top of that list:

  • Have I thoroughly researched and articulated my impact investing goals?
  • Have I decided on a do-it-yourself ESG investing strategy or should I hire an expert? If it’s the latter, have our responsibilities and duties been defined?
  • Once I’ve outlined my impact investing strategy, do I have a timeline for meeting my goals?
  • Do I have a stakeholder engagement blueprint in place?
  • Do I have a plan to switch gears – and possibly switch ESG investment advisors – in place and ready to go?

If you have a good answer to each of the above questions, you’re well on the way to becoming an effective impact investor for the long haul – and ideally for the common good.

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