Impact investing can work well with what I call "holistic wealth", the concept that true wealth comes when your mind, body, and finances are in balance, rather than skewed toward the sole pursuit of becoming rich.
WHY IMPACT INVESTING?
Many investors want to produce benefits for the planet and for society by spurring business innovation, not just engaging in philanthropy.
Impact investing can do this by coupling social and environmental good with monetary yield. There’s an array of impact investing targets, including hunger, health, education, sanitation, good jobs, infrastructure, responsible consumption, sustainable cities, and peace and justice.
Already, the field has become pretty big: a survey by the Global Impact Investing Networkfound that among 226 of the world’s leading impact investors, a total of USD 228 billion is invested in impact-related assets.
WHAT ARE THE RISKS?
Because it’s a relatively new field, impact investing hasn’t been subject to the kinds of long-term tests that guide investors. There’s no certification for impact funds, so be mindful of whether a fund is fulfilling its promise or just using “impact” as a buzzword. Have a clear definition of what "impact" means to you.
Fortunately, groups like GIIN demystify impact investing by providing case studies on best practices and resources on understanding impact metrics. Platforms like Swell offer a way to do impact investing that’s vetted by professionals.
IS IMPACT INVESTING RIGHT FOR ME?
I’ve seen that in general, impact investments can provide a return of 5 to 7%, which is below the market rate of 8 to 12%. That’s often because impact investors target a below-market return in order to achieve specific missions. There are also funds that adopt a holistic approach by investing in businesses that generate healthy returns and impact as they scale.
High net worth investors who have teams to research companies, evaluate risk, analyze past performance and measure "impact" are well-positioned for impact investing. If a majority of your assets are in this sector, it’s good to work with an established impact firm. For example, the RS Group in Hong Kong has been adopting a total impact portfolio since 2008, with a return of 5% from 2010 to 2015. They’ve also created the Sustainable Finance Initiative, a platform for impact investors to connect with one another.
Entry-level investors may want to consider using robo-advisors. The potential drawback is these tools can lack transparency, making it hard for non-professionals to analyze whether the funds are achieving the type of "impact" they’d like. Look for platforms that seek to educate you about what your investments are doing.
I’ve invested in startups devoted to making people’s lives better, and part of my criteria is that the companies have to track measurements and provide statistics showing their impact. I’ve also experimented with impact funds in Ellevest’s robo-advisor, though I’d like to see the platform become more transparent in terms of how it measures impact.
At Heels & Yield, we offer coaching services for those who want to integrate impact investing into their portfolios.
Angelina Yao is a former portfolio manager at BlackRock and the founder of Heels & Yield, which offers female-focused financial management consultancy services.
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