Americans are piling into so-called ESG investments – funds that aim to promote societal good by investing with environmental, social, and governance principles in mind. They took in a record $51.1 billion of new money from investors in 2020, according to Morningstar. That's their fifth consecutive annual record.
It's not hard to see why investors are interested, says Amit Bouri, CEO of the Global Impact Investing Network. "People are recognizing that all of their financial assets, as long as they're not under a mattress, are actively shaping the world we live in," he says. "If we want a world with more equity for women and minorities, if we want a healthy planet, we actively have to invest in it."
Some ESG mutual funds and ETFs offer exposure to wide swaths of the market, but strip out what they see as bad actors, such as weapons manufacturers or tobacco firms. Others take a best-in-class approach, building portfolios of companies or debt issuers that rate highly on environmental issues or diversity. Rather than a blanket ban of energy firms, for instance, these funds might hold the energy companies that are making the biggest investments in alternative fuel sources.
For investors who want to take things a step further, there's impact investing, which aims "to achieve a measurable social or environmental impact alongside a financial return," says Karen Wallace, a certified financial planner and director of investor education at Morningstar.
In the relatively short history of ESG investing, impact investing has largely been the province of the super rich, who could access these investments through private strategies, such as hedge funds. But with investors of all stripes clamoring to invest sustainably, impact investing is gradually becoming available to the everyday investor.
"There's been a lot of work in private-equity markets, and increasingly, those companies coming into the public market," Bouri says. "The options for retail impact investing are still evolving as we speak."
Here are three ways to start becoming an impact investor.
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You may not consider banking a form of investing, but it can be: After you lend the bank your money, and get a return in exchange, the bank then takes that money and loans it out to other people or businesses. If you care about who receives those loans, maybe it's time to examine who you're banking with.
"One incredibly accessible tool for people is to have checking or savings accounts with banks that are focused on positive impact," Bouri says.
Sustainable bank accounts come in a variety of flavors. A "green" bank or credit union may use your money to lend or give back to environmental causes and businesses. Account holders at the Clean Energy Credit Union, for instance, help fund loans for electric vehicles, solar electric systems, and other green home-improvement projects. Aspiration bank, which offers credit and debit accounts, helps fund deforestation efforts.
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Community development financial institutions (CDFIs) are banks and credit unions that are committed to providing affordable loans to low-income communities, including investing in community development projects. By lending to people and businesses in underserved communities, CDFIs hope to create jobs and help residents, often Black, indigenous, and people of color, gain access to the kind of amenities available to more privileged communities.
"These institutions are trying to increase financial access to low-income communities," says Bouri. "They're not just in cities like New York and Oakland, but also in places like rural South Carolina and Appalachia."
Would-be impact investors who hold bonds would be wise to explore an alternative: community investment notes. As with bonds, investors in these notes earn interest for buying debt – in this case, diversified portfolios of loans that fund sustainable or community-development projects.
Community notes from Calvert Impact Capital, for instance, pay an interest rate between 0.50% and 3.50% depending on their maturity, which ranges from 1 to 15 years. Investor money is disbursed among a wide array of causes, including community development, renewable energy, and sustainable agriculture.
The note offered by nonprofit Enterprise Community Partners pays an interest rate of up to 3% on a 15-year note, with the money going toward projects such as green housing developments, residences for the formerly homeless, and housing for individuals struggling with HIV/AIDS.
Investors in impact notes receive regular reports quantifying how their money has translated into environmental and societal change. Money from Calvert's investors, for instance, helped finance 4,361 affordable schools, primarily in India, in 2019.
Online investors need only $20 to get started with Calvert's note. The minimum to invest with Enterprise is higher, at $25,000.
You can use Morningstar's ESG Screener to filter for mutual funds that the firm classifies as impact funds. Under the site's guidelines, such funds seek to make measurable changes in addition to providing a return, often using the United Nations' Sustainable Development Goals to evaluate the impact of the portfolio.
Although the screener is a good place to start, you'll have to do some digging into any prospective fund's strategy to determine if it makes the sort of impact you're hoping for. Even if a fund has "green" or "impact" in the name, it may nevertheless hold stock or debt issued by companies that you may ideologically oppose investing in.
You'll generally have better luck finding measurable results among funds that invest in bonds, since these debts can go directly toward supporting ESG-related projects. The TIAA-CREF Core Impact Bond Fund, for example, invests in bonds whose proceeds directly support affordable housing, community development, and preservation of natural resources, among others. Investors can find a fact sheet on parent company Nuveen's website detailing the annual results of the fund's investments.
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You're unlikely to find similarly quantifiable results among stock funds, which generally claim the "impact" of directing investor dollars toward companies that are contributing to societal good. The literature issued by a green stock fund, for instance, will likely tell you the environmental metrics the managers use to select stocks, rather than listing how 50 different publicly traded companies impacted the environment in aggregate.
Occasionally, stock fund managers will put a number on things. Nicole Connolly, who manages the Fidelity Women's Leadership Fund, points out that if the S&P 500 was built like her portfolio, there would be 150 more female CEOs and 100 more female CFOs among the market's 500 largest firms.
The decision to be an impact investor has to be made in conjunction with your overall investment picture, with an assessment of the kinds of returns you expect the investment to deliver, says Morningstar's Wallace.
"I want to feel personally aligned with what my portfolio is doing," she says. "But it's important to look at the fundamentals of any investment and determine how it's going to help you reach your financial goals."
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