Most people need a sense of purpose in their lives in order to feel happy and fulfilled. But while the desire to make a positive difference is as old as humankind, the best ways to do it have dramatically changed in recent years.
Traditionally, the act of financially helping others and supporting causes you care about has been associated with giving away money. But what if we told you that it’s possible to make your money grow in the process, too? This is where impact investing comes in.
What is impact investing?
Impact investing refers to investments made with the intention to generate positive, measurable, social, and environmental impact alongside a financial return.
Sustainable investments: The practice of analysing a company’s environmental, social, and governance (ESG) risks and their opportunities.
In this way, sustainable investing and impact investing are two related but different approaches.
As described by Dr Hakan Lucius, head of corporate sustainability at the European Investment Bank: “The key difference between sustainable investing and impact investing is that sustainable investing tends to be more focused on ESG integration and risk management, while impact investing is focused on generating positive impact and creating change.”
Five steps to building an impact portfolio:
1. Decide what your goals are
Before making any investment, it’s important to know what your life goals are, as these will heavily influence how much risk you should be taking and how long you should aim to have your money invested. For example, if you’re a student or newly graduated, most people’s goals are to minimise or pay off their student debt. If you have been working full-time for some years, your goal might be to get on the property ladder. If you’re older and later in life, goals typically revolve around saving enough to sustain your lifestyle into retirement.
No matter what your goal is, the key is to note how much money is required and how many years you have to achieve it. Generally speaking, the more years you can afford to leave your money invested, the more risk you can afford to take. This is great because risk and reward go hand in hand, meaning the higher the risk, the higher the chance for greater returns.
2. Decide which values are most important to you
Defining which values matter most to you (in a business context) is important so you know where to place your focus. Many values related to environmental, social, and corporate governance (ESG) might overlap. For example, social criteria companies seek to comply with environmental laws and broader concerns about sustainability. But it is still a good idea to know which matters the most to you. Below is a list for inspiration:
• Low carbon emissions
• Corporate governance
• Data privacy and security
• Environmental operations
• Environmental supply chain
• Human capital
• Public policy
3. Diversify, diversify, diversify
No matter how many years you have to achieve your goals, diversifying your portfolio is a must. More diversifying = less risk. Let’s say you only invest in companies that produce wind energy; if a new regulation means it suddenly becomes much harder for these companies to develop wind parks, chances are the stock prices for the entire industry will drop, and all your investments will follow suit. If only 10% of your portfolio were invested in wind energy, then naturally, only 10% of your portfolio would be affected. That’s why it’s crucial to invest across different asset classes, regions, and industries. As a rule of thumb, the more diverse your portfolio, the less risk you accrue.
4. Define your target allocation
Asset allocation is the composition of your portfolio across the different asset types. For most people, the vast majority will consist of stocks, funds, and bonds, but remember, the potential for impact is much bigger in some of the alternative asset classes, such as crowdfunding or angel investing, so allocating even a small portion of your portfolio towards alternatives you can have greater impact.
You should never make any investments without doing thorough due diligence first, as your capital is at risk.
Condensed and extracted from Girls Just Wanna Have Impact Funds by Camilla Falkenberg, Emma Due Bitz, and Anna-Sophie Hartvigsen, (DK, £14.99).
