What is impact investing?

Sep 14, 2021 | RBC Wealth Management


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When it comes to investing, many people seek only returns without thinking about what their money is supporting.

Scientist working in a lab

With impact investing, investors are able to be more intentional about where they invest so their portfolios can have positive influence.

“Every portfolio has an impact,” says Kent McClanahan, vice president of responsible investing for RBC Wealth Management – U.S. “But impact investing is about being more conscious of what your money is doing.”

An opportunity to think about your non-financial goals

If you have a cause you want to support, you might donate to a nonprofit organization to back their mission. Impact investing is similar in that you choose companies, funds or projects that align with your values. However, you’re also analyzing these investments on their ability to generate a positive, if not competitive, financial return.

Much like finding a nonprofit to support, you start by determining the impact you want to make. Do you want to fund a startup biotech company developing a potential cure for cancer? Or do you want to invest in technologies that can reduce the impact of climate change? Perhaps you want to ease income inequality by financing affordable housing in your city? The goal is to seek investments that directly correlate to your cause so you know your money is directly funding their work.

At the same time, impact investing is not charity—you should expect your investment to generate a financial return in addition to a societal return. How much of a return depends largely on your goals.

“One of the dichotomies within impact investing is whether the expected returns are concessionary or market driven,” says Ron Homer, chief strategist for impact investing at RBC Global Asset Management. “There are some impact investment strategies where returns are secondary to the impact. On the opposite side, our strategies are designed to provide the double impact of market returns and social benefits. In some cases, the social benefit can drive excess returns.”

How to make an impact in your portfolio

Impact investing is still an emerging approach, with no set standards. This means you may need to dig a little deeper to see that prospective investments meet your requirements.
The good news is that impact investing is becoming easier for investors. For example, the European Union passed a rule called the Sustainable Finance Disclosure Regulation that requires fund managers to share a measurable plan for how their investments meet their stated environmental, social and governance (ESG) goals. This should help create a culture of impact measurement that increases investor expectations for ESG and impact data, which should encourage companies to improve their reporting, McClanahan says.

“Now if an investor wants to have an impact within the public markets, we can measure it a little bit more so they can make an intentional investment,” he says.

How to get started with impact investing

For investors looking to get started with an impact investing approach, the first step is to choose where to focus. According to Homer, the two fastest-growing areas for impact investments are climate change and reducing social inequality through community development and social justice.

Once you choose your areas of focus, you should work with your advisor to measure the impact of your portfolio and make decisions about how you should reallocate investments.

Impact investing allows more of your money to work as one to create the most positive impact. “Think about someone who’s using their philanthropic dollars to address an issue because they feel passionate about it, yet their investments might be working to support the problem they’re trying to address,” says Homer. “If this is important to me and I’m trying to solve it with my vote, my volunteerism or my philanthropy, putting my money to work on the other side to have an opposite effect doesn’t make a lot of sense.”

Your financial advisor can help you prioritize all of your various passions and causes so you can optimize your portfolio to make the greatest difference.

Disclaimer:

Due diligence processes do not assure a profit or protect against loss. Like any type of investing, impact and ESG investing involve risks, including possible loss of principal.

Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.