When you invest in a company, you usually know what you’re getting into. You’ve conducted extensive research on the company’s products and how they conduct business. You know all about how the company makes money and what could cause them to lose it. You made your investment for the sole purpose of having your money make more money over time.
When you invest in a mutual or exchange-traded fund, you don’t always know what you’re buying. This investing method lets you invest money in small percentages of many stocks. Mutual funds buy these stocks based on what they think will perform well. Exchange-traded funds buy based on data and indexes. You end up with shares across different business sectors, which diversifies your portfolio.
Sometimes, you might not want to invest in certain companies. If you care about climate change, you’re not going to want to invest in oil stocks. If you’re passionate about gun reform, you wouldn’t want to invest in weapons stocks. When buying ETFs or mutual funds with hundreds or thousands of companies, you don’t always get a say in what you own.
That’s where impact investing comes in.
What is impact investing?
Impact investing lets you make money on the stock market, but also do some good in the process. Instead of only looking at a company’s financial details, impact investors consider a company’s effect on the world. This could mean reducing a tech giant’s carbon footprint. It could also involve retailers supporting disadvantaged employees.
Impact investing is investing with a conscience. If you invested in the energy sector, an impact investment would mean investing in renewable sources. If you’re against sexism or homophobia, you would invest in stocks with strong workplace equality guidelines. There are countless causes with as many stocks or funds to match. If you’re passionate about a cause or movement, chances are an existing stock or fund supports it.
Unlike charitable giving, impact investments aim to turn a profit. By investing in these “woke” companies, you are more or less telling them to keep up the good work. You also hope that they make more money as they continue to support your cause(s) of choice. In the end, your money will go towards doing some good and growing your portfolio in the process.
How do you impact invest?
If you want to invest in individual companies, you need to look at whether they’re worth investing at all. Some of the questions you need to answer before investing include:
- Is this stock growing?
- Is the stock showing any signs of short- or long-term decline?
- Can external factors cause them to lose value soon?
- Are they anywhere near the market average?
There are many questions one must ask before buying a single share in a company. (Read our how-to guide for more on this research.) For impact investing, you need to ask another set of questions:
- Is the company committed to this cause?
- Will the company actually have a meaningful impact on this cause?
- Would you stick with the company if they abandoned their commitment?
What are impact ETFs?
If you want to diversify your portfolio, you could always invest in impact ETFs. These funds follow ana impact-friendly index and buy stocks based on one or more causes. $EQLT, for instance, invests in companies supporting workplace equality. $ETHO invests in clean energy stocks, like solar and wind companies. Impact ETFs are rather recent, and many trade at low volumes for low share prices. At the same time, they’re worth exploring if you want to decrease risk, make a profit, and do some good in the process.