At Woven Capital, many of our clients are interested in investing in a way that aligns their money with their values. For some, this means finding portfolio allocations that score well according to environmental, social, and governance standards. For others, they may want to take their investing further by using their money to support specific businesses or causes who’s goals and values align with their own.
In the world of socially responsible investing, there are three key “buzzwords” that you need to know –
- Impact Investing.
Today, we’ll go over how each of those terms is defined, and how you can determine which method for investing is most closely connected to how you want to leverage your wealth.
Understanding The Difference Between ESG, SRI, and Impact Investing
To make decisions about your unique investing style, it’s important to know what type of socially-minded investing you want to pursue. Let’s look at the three “big players” in the world of responsible investing, and how they can be leveraged as part of your strategy.
ESG: Environmental, Social, Governance
Investors who leverage ESG are looking at specific business practices and how they score in these three categories. ESG investing still primarily focuses on financial performance, but it has a lean toward socially minded investing initiatives. In general, ESG investments consider a wide range of applicable topics, such as:
- Animal welfare
- Climate change and pollution
- Human rights
- Child labor
- Conflicts of interest
- Transparency in communication
Just to name a few! This is often a good way for investors to dip their toe into the waters of responsible or impactful investing, and can help them feel confident in socially responsible financial decisions.
SRI: Socially Responsible Investing
This takes responsible investing to the next level. Socially responsible investors don’t just look for companies that score well in ESG categories, their investments are actively screened to remove companies that violate specific guidelines. For example, companies that sell or invest in tobacco products or addictive substances, or the sale of firearms and weapons, can be removed from your portfolio through SRI methods.
Of course, financial performance is always a factor, but with SRI portfolios, investors take a balanced approach to weigh financial performance against ethical risks.
In many ways, Impact Investing is the most in-depth and values-based approach to investing available. Investors who pursue this route are looking to make a (you guessed it!) positive impact with their money. These portfolios are designed to not only gain a financial return, but to have an influence or impact on a specific company or cause that is meaningful to them.
For example, impact investors may seek out individual companies or startups whose mission aligns with their own ethics and values, or whose services or product have an impact on a cause that’s meaningful to them, or even their local community.
Can Impact Investing Create a “Solid” Investing Strategy?
Some investors want to pursue impact investing, but feel uncertain that it will help them achieve their lifestyle or financial goals. The truth is that, even though you are pursuing an investing strategy that makes an impact, the same “rules” apply when it comes to your portfolio management.
Your investments may be geared toward social responsibility, but a financial planner with experience in the world of Impact Investing and SRI knows that balancing impact with risk, goals, tax efficiency, and your unique time horizon for needing the funds from your investments is still critical.
Finding companies or investments that align with your values and goals for social impact can feel like a challenge, but navigating those waters with a professional can help to take the burden off your shoulders. You can feel confident knowing that your strategy is still engineered with your goals in mind, all while making an impact and leaving a kind of “living legacy” through your investments.
Of course, comparing impact-focused portfolios to non-impact-focused portfolios is a little bit like comparing apples to oranges. Regardless of your investing methodology, it isn’t advisable to “chase” returns. Instead, you (and your advisor!) should be focusing on how your strategy is moving you toward your goals on your unique timeline, and if your investments are having the impact you desire. Using these new “goal posts” you can successfully track your investments’ success, and feel confident adjusting your strategy as you go.
Pursuing Impact Investing or SRI on your own is doable – but it can be difficult, and often time consuming. Working with a like-minded advisor can help you to find balance in your life while using your wealth in a meaningful way. Want to learn more? Reach out! I’d love to speak with you about what goals you want to achieve through Impact Investing.