What is impact investing? (2024)

Impact investing is the act of purposefully making investments that help achieve certain social and environmental benefits while generating financial returns. It’s a broad term that refers to everything from investing in companies with an explicit mission aligned with your values to avoiding investing in companies that do not meet those criteria. It can also be defined more expansively to include donating to nonprofits and projects that blend these charitable funds with investment capital to support larger or higher-risk projects that may not otherwise be financially viable.

This strategy is based on the idea that you can align your investments with your personal and philanthropic values while realizing financial returns. So, for example, if you were interested in reducing the use of fossil fuels, you might invest in funds focused on companies that develop innovative renewable energy solutions.

Growth in impact investing has been driven in large part by interest among the wealthy and among women. But a generational shift may help to popularize the approach even more. More than 40 percent of Millennials say they have engaged in impact investing, compared to only 20 percent of Baby Boomers.1 These trends, as well as increasing numbers of institutional investors incorporating impact into their approach, have been accompanied by a growth in options for individual donors and investors who want to participate in impact investing.

What are the types of impact investing?

There are many different ways to invest for social or environmental impact or both. Here are a few common ones:

  • Invest in mutual funds, exchange-traded funds (ETFs) or bonds that choose companies that align with values that matter to you. Many of these funds select companies according to faith-based criteria, environmental practices or human rights. (See “What is socially responsible investing?” below.)
  • Avoid investing in companies whose practices you disagree with. Some investors, for example, avoid “sin” stocks, like producers of alcohol, tobacco or weapons.
  • Make a charitable donation or a charitable grant to organizations or projects that blend charitable support with investment capital to support higher-risk projects that may not otherwise be financially viable. New initiatives to address a societal need may not be financially feasible or profitable until they can cross a threshold that lets them compete in the marketplace—and may even be nurtured in the nonprofit space first. There are severalnonprofit organizations that specialize in making impact investments. The profits generated from their investments, if any, are then reinvested into new projects.
  • Invest directly in private companies or funds with an explicit social mission. This may be through venture capital investment or share purchases. For example, you could invest in companies that focus on solar power, carbon sequestration or alternative fuels.
  • Lend to a nonprofit, whose mission you want to support. One way to accomplish this is through a nonprofit loan fund. Loan funds allow lenders to pool their capital and spread their risk in a diversified portfolio.

What are the benefits of impact investing?

Impact investing offers a variety of benefits—some quantifiable and tangible, others less so but still important. Here’s a sample of the benefits of impact investing:

  • Promote and encourage corporate practices that are important to you, such as fair labor practices or environmental stewardship.
  • Use more of your resources—beyond what you donate to charity—to support issues that matter to you.
  • Support approaches to addressing societal issues that are sustainable and not fully reliant on philanthropic funds.
  • Make your money go further. You can recycle returns on impact investments for further social impact.

It’s also important to note that investing for impact doesn’t necessarily mean you have to compromise financial returns. Numerous studies have looked at the performance of impact investments and found that investing in sustainability has usually met, and sometimes exceeded, the performance of traditional investments.

What is socially responsible investing?

Socially responsible investing (SRI) is often used synonymously with impact investing or sustainable investing. SRI typically refers to strategies for investing in mutual funds or corporate stocks and bonds based on one’s values. In general, a socially responsible investor tries to encourage corporate practices such as environmental stewardship, consumer protection, human rights and diversity.

As impact investing becomes more popular, the number of available SRI investment options has grown. Some emphasize aspects of a company’s behavior or management—often labeled as ESG (environmental, social and governance) factors. For example, gender-focused ESG funds select companies with significant female leadership while green funds might focus on companies that limit water consumption or carbon emissions.

Other social-impact funds focus on companies that generate revenue from products or services that address a specific social issue, like renewable energy or affordable housing.

Finally, some funds are notable simply for what they do not include. They may exclude “sin stocks” for example, such as shares of businesses that operate in industries like alcohol, firearms, tobacco, gambling or military weaponry.

How can I participate in impact investing?

The simplest way to get started with impact investing is by investing in one of the growing number of ESG funds or by donating to an impact investing nonprofit. More sophisticated strategies, such as making an investment in individual companies or lending to nonprofits, can be a complex enterprise and require more knowledge and expertise.

How can I explore impact investing with a donor-advised fund?

Adonor-advised fund, like theGiving Accountat Fidelity Charitable, is like a charitable investment account for dedicated use in supporting charities. When you make an irrevocable contribution to a donor-advised fund sponsoring organization, you are eligible for an immediate tax deduction, and then can recommend grants over time. The dedicated charitable funds can be invested for tax-free growth so there is potentially more money available for giving.

If you have a donor-advised fund, there may be multiple options to explore impact investing, though such options may vary depending on the sponsoring organization. On the investment side, you may be able to recommend that your account balance be invested for tax-free growth in an impact investing option. At Fidelity Charitable, for example, donors can recommend investments from a variety of options, including anESG fund.

Additionally, a growing number of donors are also choosing to recommend grants to impact-investing nonprofits.According to the 2024 Fidelity Charitable Giving Report, donors recommended grants totaling more than $70 million in 2023.

More options may be available to donor-advised fund donors who wish to take an even more significant step into impact investing. For example, donors in Fidelity Charitable’sPrivate Donor Groupcan invest in impact-oriented private equity or venture capital funds, and make recoverable grants to nonprofits that can be repaid to your donor-advised fund once the project is complete so the funds can be used for additional grants.

1 2021 Future of Philanthropy, Fidelity Charitable

What is impact investing? (2024)

FAQs

What is impact investing? ›

Key Takeaways. Impact investing is an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact. Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.

What is the meaning of impact investing? ›

A way to make a difference with your investments while generating financial returns. Impact investing is the act of purposefully making investments that help achieve certain social and environmental benefits while generating financial returns.

What is impact investment for dummies? ›

Unlike traditional investing, where the goal is purely financial gain, impact investing seeks to make a difference. Impact investing firms support causes like renewable energy, healthcare, education, and economic development.

What makes a successful impact investment? ›

Elements of impact investing

INTENTIONALITY An investor's intention to have a positive social or environmental impact through investments is essential to impact investing. INVESTMENT WITH RETURN EXPECTATIONS Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.

What questions are asked at the impact investing interview? ›

Impact investing interview sample questions

How do you demonstrate a commitment to social and environmental change in your own life? Tell me about a time you overcame a significant challenge on the job. When you are stuck on a project, what is your go-to response? Are you comfortable learning new skills?

What is impact investing best examples? ›

An impact-investing strategy is an investment strategy that targets companies or industries that produce social or environmental benefits. For example, some impact investors seek to support renewable energy, electric cars, microfinance, sustainable agriculture, or other causes that they believe to be worthwhile.

What is impact investing intention? ›

Impact investing is marked by an intentional desire to contribute to measurable social or environmental benefit. Impact investors aim to solve problems and address opportunities. This is at the heart of what differentiates impact investing from other investment approaches which may incorporate impact considerations.

Why do we need impact investing? ›

Impact investing seeks to add value to society. For the impact investor, value creation for society and financial return are equally important.

What is the principle of impact investing? ›

Impact investing is an approach that aims to contribute to the achievement of measured positive social and environmental impacts.

What is another word for impact investing? ›

In general, impact investing is an umbrella term and can be used as a broad synonym for ESG investing and socially responsible investing.

How effective is impact investing? ›

Impact investing probably isn't totally useless — it does seem to slightly improve access to capital for social good companies. So if you know you'll never donate any money to charity anyway, and you're okay earning worse returns in order to support promising companies, then it might be better than nothing.

What are the four core characteristics of impact investing? ›

These four characteristics are (1) Intentionality, (2) Evidence and Impact data in Investment Design, (3) Manage Impact Performance, and (4) Contribute to the growth of the industry.

What are the risks of impact investing? ›

One of the key risks is that impact investments may not generate the intended social or environmental impact. Another risk is that financial returns may be lower than anticipated. There are a number of different types of impact investments.

What skills do you need for impact investing? ›

1 Financial analysis and management

Social finance and impact investing professionals need to have a solid grasp of financial analysis and management, such as accounting, budgeting, valuation, risk assessment, and portfolio management.

How do you evaluate impact investing? ›

The method consists of six steps.
  1. Assess the Relevance and Scale. ...
  2. Identify Target Social or Environmental Outcomes. ...
  3. Estimate the Economic Value of Those Outcomes to Society. ...
  4. Adjust for Risks. ...
  5. Estimate Terminal Value. ...
  6. Calculate Social Return on Every Dollar Spent.

How do you answer an impact question? ›

Use this structure to answer the question:
  1. Give a fact and a story: this means providing context and information, before explaining your own experiences. ...
  2. Explain what you did: this means demonstrating personal responsibility and not talking about what other people did.

Can you make money from impact investing? ›

Businesses started with microfinance loans are providing competitive returns to their investors through the bonds that back them. In some instances, impact investment vehicles have been able to garner higher returns for their investors than the broader markets did, especially during down cycles.

What are the cons of impact investing? ›

One of the key risks is that impact investments may not generate the intended social or environmental impact. Another risk is that financial returns may be lower than anticipated. There are a number of different types of impact investments.

How much do impact investors make? ›

As of May 8, 2024, the average annual pay for a Social Impact Investing in the United States is $102,220 a year. Just in case you need a simple salary calculator, that works out to be approximately $49.14 an hour. This is the equivalent of $1,965/week or $8,518/month.

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