This is a brief post describing the basics of impact investing. In it, I will discuss the ways in which you can practice it as well as the social, ethical, and financial benefits of this particular investment strategy. Enjoy!
A few days ago, The Dynalect Team published a report on the clean water industry. In it, we recommended several stocks and ETFs that we believed to be the best equipped to benefit from an increased in demand for access to clean water. While all of our recommended securities were in some way related to the water purification industry, some of them, like Consolidated Water Company (NASDAQ: CWCO), which desalinates saltwater in several South American and Caribbean countries, are directly involved in providing potable water to people where there is insufficient access to clean drinking water.
Investing in a company like Consolidated Water Company can be considered an act of impact investing, which is defined as “investing that aims to generate specific beneficial social or environmental effects in addition to financial gain” (Investopedia). By investing in a company involved in providing access to clean water, renewable energy, accessible health care, or a host of other socially or environmentally beneficial products and services, you are actively contributing to the social benefits these companies produce. In other words, your investment is making a positive social impact.
There are many ways an individual can practice impact investing. I’ll list and describe several of the most accessible ones below.
Likely the most accessible form of impact investing, crowdfunding is a way of earning money for a cause, service, or product though many small investments. Companies like Kickstarter, and now Facebook, provide platforms in which individuals can pledge money to an individual or company either as a donation or in exchange for a particular reward. While these “rewards” are not capital gains, they can be tangible products or services, and represent a type of return on your investment. If the crowdfunding project in question is socially or environmentally beneficial, your pledge to it is a form of impact investing.
P2P (peer to peer) Lending
Peer to peer lending allows individuals to lend or borrow money without the presence of a large institution like a bank. P2P lending platforms provide an intermediary between an individual lender and an individual borrowing. Many of these services allow individuals to make small loans (ballpark of $25), and then collect them over time. Because of the small size of these loans, many are made to people in developing countries in need of assistance for small business ventures. This Forbes article recommends several P2P lending platforms.
Microfinance institutions provide loans to low income populations typically in developing countries. These institutions can be nonprofit or for-profit, and they vary extensively in size, clientele, and location. Right now, the most accessible investments in microfinance would be donations to a non-profit institution, like the ones listed here. Obviously, the return on investment when donating is not capital gains, but rather social gains in the form of improved economies, quality of life, or other social/environmental factors. When investing or donating to microfinance institutions, be sure to check they they engage in ethical practices.
This is the most clear-cut way to impact invest, and it is the one that provides capital gains in the most straightforward manner. Investing in companies that provide a product or service that benefit society or the environment in some way can be a financially and morally rewarding endeavor. Many publicly traded companies release a social impact statement or a corporate responsibility statement (CRS) that describes how that company’s operations will benefit the community or environment in which it operates. By reading this type of statement and researching the products, services, and practices of a company, you should be able to gauge the amount of environmental or social benefit a company is producing.
When impact investing, keep in mind that there are usually two types of gains: altruistic and financial. Altruistic gains can be thought of as the social or environmental benefits of the investment, while financial gains are the capital gains from an investment. Sometimes it can be difficult to pick an investment that provides both altruistic and financial gains, and that’s what makes impact investing more challenging than solely donating or solely investing.
In my opinion, this challenge of matching financial and altruistic gains makes impact investing all the more rewarding, and it’s a practice that I believe to be extremely important as both an investor and a global citizen.
See you next week,