Introduction

In the age of climate change, social and economic inequity, and global crises such as Covid-19, decisions about where we invest and spend our money are powerful.

Publicly-traded companies are accountable to customers, investors, and shareholders, including through shareholder resolutions and criteria that companies must meet to be included in some large investment portfolios (such as Blackrock's). Making informed decisions about your purchases and investments can be a powerful way to help accelerate the reshaping of our economy and planet.

So how can you get started investing for impact? First let's look at what impact investing is.

What is impact investing?

Impact investing means investing "with the intention to generate positive, measurable social and environmental impact alongside a financial return."

Impact investing provides capital to address pressing challenges -- climate change and renewable energy, racial and gender equality, affordable housing, accessible healthcare, and more -- while also generating a financial return.

For example, an impact investment might invest in a company that develops new sources of clean energy, expands internet service to under-served rural areas, or reduces plastic use with reusable containers. Either directly or indirectly, all impact investments seek to have a positive effect on at least one cause.

Many investors use the United Nations Sustainable Development Goals (SDGs) as a framework for understanding and measuring the impact of their investments. Impact investments seek to contribute to one or more of the 17 inter-linked goals:

The SDGs include measurable outcomes that investments contribute towards, such as building affordable housing or making healthcare more accessible.

Impact investing has grown rapidly over the past few decades. In the US, $1 out of every $4 under professional management is in an investment considered socially responsible. This amounts to ~$12 trillion in assets under management yearly. Globally the number is close to $30 trillion.

Investing for positive impact does not necessarily mean trading off financial performance. A 2015 study examined 2,200 pieces of research and found that about 90 percent showed no negative relationship between concern for social factors and corporate financial performance. A large majority, in fact, showed positive findings that were stable over time.

More recent studies have produced similar findings, such as this report from Morningstar.

How you can get started: ESG investing

There are a few variations of impact investing that you can get started on, including Environmental, Social and Governance (ESG) investing.

ESG investing rates companies' performance on environmental, social and governance criteria, such as carbon emissions or percent of women on the board. Companies that perform poorly are excluded (for example, an ESG fund may screen out tobacco, weapons, or fossil fuel companies), or only companies that score above a threshold are included.

When you invest in an ESG fund or use ESG criteria to select stocks, you're investing in companies that are deemed more ethical across a variety of criteria.

There are many ways for retail investors to invest with ESG criteria. Some example funds available through many online brokerages and financial advisors are:

Vanguard Passive strategy that tracks the FTSE4Good US Select Index, a market-capitalization-weighted index that screens constituents for ESG criteria.
iShares Invests in large- and mid-cap American companies, excluding firms in the tobacco or civilian weapons industries as well as firms that have suffered through "very severe business controversies."
Nuveen Seeks to replicate the performance of the Russell 3000 index, without companies that don't live up to its ESG standards related to climate change, natural resource use, human capital, business ethics and corporate governance. TICRX requires a minimum investment of $2,500 for retail investors.

There are many more that you can find through your online brokerage or with your advisor. ESG funds have traditionally been slightly more expensive than non-ESG funds, but the cost has come down significantly over the past few years.

There are also online brokerages that specialize in ESG investing, such as Earthfolio.

How you can get started: socially-responsible investing

Socially-responsible investing is similar to ESG investing but takes a more active approach to removing or choosing investments based on specific ethical guidelines.

This type of impact investing often includes both negative screens (such as removing tobacco, weapons, or fossil fuel companies) and positive screens (such as focusing on companies that derive revenue from clean energy, affordable housing, or accessible healthcare for all).

Socially-responsible investing generally includes more specific, measurable impact outcomes compared to ESG investing, such as carbon emissions offset or living wage jobs supported.

Examples of socially-responsible investment options available to retail investors include:

iShares Invests in companies from around the world that derive at least 50% of their revenue from products and services that address the United Nations' Sustainable Development Goals
Impax Asset Management Fund tied to the Impax Global Women's Leadership Index, which evaluates 1,600 global companies for criteria such as the representation of women in management and gender pay equality.
Impact Shares SDGA tracks the Morningstar Societal Development Index, which is designed to provide exposure to companies worldwide with strong policies and practices relative to the UN SDGs, and that are actively engaged in the world’s poorest countries (the 47 Least Developed Countries).

If you want to find specific companies that meet socially-responsible or ESG criteria, many sources evaluate company impact on issues such as climate change or social justice. You can find some of these in Ethos' report, "Top Corporate Watchdogs," or by looking up companies on Ethos.

If you want to screen for funds that meet certain ESG or socially-responsible criteria, As You Sow offers a fund filtering tool to find fossil-free funds, gender equality funds, gun-free funds, and other funds that align with your values.

How you can get started: "direct" impact investing

"Direct" impact investing takes the most active approach to selecting specific projects, organizations or companies that are working to do something positive to benefit society.

An example is an investment bringing eye care to a population that previously did not have access to quality eye care through a mix of hospitals, vision centers, and mobile eye clinics.

This type of investing includes specific, measurable outcomes, often in a local community. For example, number of affordable housing units built in a community, or minority-owned businesses supported.

There are many options for retail investors to get involved in direct impact investing. A few examples include:

Calvert Impact Capital With as little as $20, you can channel capital to community-development initiatives such as affordable housing and environmental protection.
Impact Finance Center A multi-university nonprofit academic center that identifies, trains, and activates individuals and organizations to become impact investors.
Impact Assets Several offerings that combine impact investing and charitable giving toward causes you care about.
Community banks
Community banks
Some community banks offer investment options that support the local community. One example in Minneapolis, MN is Sunrise Bank's Impact Deposit Fund (IDF), which uses deposited funds to make loans that support local community development, such as affordable housing and community services.

How you can get started: 401k or employee retirement plans

If you have a 401k or other retirement account through your employer, do you know what it's invested in?

Just 2.9% of 401k plans have at least one fund dedicated to environmental, social and governance issues, according to the Plan Sponsor Council of America's most recent member survey. You are probably invested in companies that extract or refine pollutants, mow down rainforests or mistreat people in some way.

Take the SPDR S&P 500 ETF (SPY) as an example. The highly-traded ETF tracks the S&P 500 Index and holds 500+ stocks. If you own SPY, you are invested in:

2 tobacco companies 1
14 weapons companies 2
159 companies that have received customer or product fines in the last 3 years 3
227 companies that have received worker-related fines in the last 3 years 4
91 companies that have received environmental fines in the last 3 years 5
24 oil companies

So how can you influence what's in your 401k? Here are a few steps from the NY Times:

  • Someone (or a committee of people) at your employer likely picks or approves the lineup of funds for your 401k. Ask a human resources person (or the president or another leader at a smaller organization)
  • Ask if you can see details about what the retirement plan is investing in
  • Consider starting small with a single request, such as adding a socially responsible fund focused on large American companies. If that’s successful, work on adding more over time
  • Consider requesting a brokerage window (or "self-directed option") with your 401k. This is an option for employees to effectively have their own investment account within their 401k (buy and sell securities through a brokerage platform)
  • If there is a sustainability committee, show them how some of the stocks in the retirement plan's funds may not be consistent with the company’s efforts elsewhere

How you can get started: financial advisors

There are a lot of options to start investing for impact. Most financial advisors offer some options to help (such as ESG or socially-responsible funds), and some specialize in impact investing.

If you're thinking about working with an advisor, here are a few questions to ask potential advisors:

  • How do you evaluate the social and environmental impact of investments?
  • What ESG or socially-responsible funds could you help me invest in?
  • How would you tailor my portfolio to achieve impact on the causes I care about?

Some example advisors that could help include:

Greater Good Financial Financial advisor offering sustainable investments. Donates 20% of revenue to non-profits.
AlphasFuture Woman-owned asset manager. Mission is to deliver long term capital appreciation to investors by Investing in Innovation that drives Sustainability.
Impact Assets Financial advisors helping clients achieve financial goals and build financial character.
About Ethos

Ethos is a first-of-its-kind FinTech platform for consumers and investors to align their spending with the causes they care about, including racial justice, workplace safety, climate change, LGBTQ equality, and more.

Ethos lets you select the causes you care about and get personalized ratings of companies, brands, employers and investments, based on hundreds of credible sources.