What is Sustainable Impact Investing?

Imagine a world where you support a company that aligns with your values and promotes issues like environmental sustainability or social justice — and offers strong returns. Enter sustainable impact investing, a branch of investing that filters a company’s investment potential against the investor’s values. Read on to learn key factors in sustainable impact investing and how to start investing for sustainable impacts. 

How Does Sustainable Impact Investing Work?

Sustainable impact investing — also known as impact investing, responsible investing or environmental, social and governance (ESG) investing with an impact focus — involves investing in companies, organizations or projects with the intention of generating positive social and environmental impact alongside financial returns.

The goal of sustainable impact investing is to allocate capital toward companies, organizations and projects that promote sustainability and contribute to positive societal and environmental outcomes. To do this, sustainable investing considers a company’s ESG factors in combination with traditional financial analysis when making investment decisions. 

Investors increasingly recognize that businesses have a role in addressing global challenges, such as climate change, resource scarcity, social inequality and human rights. Where you put your investment dollars can have a positive impact. 

How is Sustainable Impact Investing Different From Traditional Investing? 

Sustainable impact investing differs from traditional investing by explicitly considering investments' broader social and environmental consequences. With this type of investing, financial considerations are still important assessments of a company’s potential. 

However, impact investing goes beyond financial returns and seeks to generate a measurable positive impact on specific sustainable development goals or other targeted areas. 

What Are the Key Principles of Sustainable Impact Investing?

The foundation of sustainable impact investing is integrating ESG factors into investment decisions. Impact investors measure and manage impact alongside financial performance to actively contribute to positive change.

This may take an inclusionary or exclusionary approach. With an exclusionary approach, you avoid companies that don’t align with your values or impact goals. With an inclusionary approach, you favor companies that align with your impact goals or values. 

How is Impact Measured In Sustainable Impact Investing?

Impact measurement in sustainable impact investing involves quantifying and assessing the social, environmental or economic outcomes generated by investments. 

Various frameworks and metrics used to evaluate the positive changes made by the invested capital can include the number of lives improved, reduced carbon emissions or adopted sustainable practices. It can also be a broad strategy measuring the percentage of your portfolio invested in carbon-neutral companies or companies dedicated to social betterment. 

Are Financial Returns Compromised in Sustainable Impact Investing?

Sustainable impact investing aims to deliver competitive financial returns while generating a positive impact. While individual investment performance may vary, studies suggest that integrating sustainability into investment decisions can contribute to long-term financial performance. 

Examples of Sustainable Impact Investing

While you may choose any impact goal and don’t need to allocate all of your portfolio to this sector. However, many investors allocate a percentage of their portfolio to achieve a certain goal. Common impact goals include:

• Renewable energy projects: Investing in renewable energy projects, such as solar or wind farms, helps accelerate the transition to clean and sustainable energy sources, reducing reliance on fossil fuels and mitigating climate change.
• Affordable housing initiatives: Investing in affordable housing projects aims to provide safe and affordable housing options for low-income individuals and families, addressing the social need for adequate housing and promoting inclusive communities.
• Sustainable agriculture ventures: Supporting sustainable agriculture initiatives, such as organic farming or regenerative agriculture, promotes environmentally friendly and socially responsible food production practices while ensuring food security and reducing the ecological footprint of agriculture.
• Clean technology companies: Investing in clean technology companies that develop innovative solutions for environmental challenges, such as renewable energy technologies, energy-efficient products or waste management systems, helps drive sustainable development and combat climate change.

5 Things to Consider With Sustainable Impact Investing

If you’re ready to start sustainable impact investing, here are key factors to weigh. 

1: Investor Education and Expertise

Traditional financial analysis should be your first filter for potential investments. In addition, more green and sustainable companies welcome stakeholder engagement in further impact goals.

Stay informed about industry developments to understand current trends and investment potential. Engage with experts in sustainable impact investing and seek advice from professionals with experience in sustainable investing to build your personalized investment strategy. 

2: Market Dynamics and Investment Opportunities

Evolving market dynamics and growing investment opportunities within sustainable impact investing make finding companies working to reach ESG goals easier than ever.  

With increasing focus on carbon emissions and renewable energy sources, sectors are emerging to address consumer demand while major players are shifting policies. While ESG investing isn’t new, emerging companies offer new avenues for investors to make a positive impact while seeking financial returns.

Investment opportunities range from ESG ETFs and ESG mutual funds to emerging companies utilizing hemp. 

3: Alignment With Values and Objectives

Aligning investments with personal values and objectives is the foundation of sustainable impact investing. Thoroughly researching and understanding the underlying impact of investment opportunities to ensure they align with your sustainability goals and to better avoid greenwashing.  

4: Impact Measurement and Reporting 

You can use major frameworks like MSCI or Morningstar's Sustainalytics to analyze a company’s overall sustainability performance with reference to ESG factors. However, assessing an individual investor’s overall impact may be difficult. 

In addition, company-produced sustainability reports can be subjective or greenwashed. A clear measurement of individual impact is satisfying and may increase motivation in this investment strategy. Without a clear, objective reporting framework, investors are left to estimate their impact. 

5: Risk and Return Profile

Different investment opportunities within this space may carry varying levels of risk and potential financial returns. The risk and return profile of sustainable impact investing should be comparable to an individual investor’s risk tolerance.  

It’s important to understand the trade-offs of aligning expectations with high-risk sustainable investments. For financial sustainability, investors must build a diverse portfolio and perform standard financial analysis for risk mitigation.

Advantages of Sustainable Impact Investing

There are significant advantages to this investment approach, including:

• Sustainable returns while focusing on personal values
• Less historical volatility during market downturns
• An additional filter to assess investment opportunities
• Ability to create the world you want while building wealth

Disadvantages of Sustainable Impact Investing

While many investors find significant benefits in ESG investing, interest has waned in recent years. Possible disadvantages include:

• No guarantee of financial performance
• No clear metrics for measuring the impact
• Difficulty in weeding out greenwashing from genuine ESG companies
• Limited investment options based on impact goals

Comparison: Sustainable Impact Investing vs. ESG Investing

Sustainable impact investing goes beyond ESG considerations by seeking to generate positive social and environmental impact alongside financial returns. Impact investors may choose one or more specific impact goals and measure their impact over time. This can bring personal fulfillment along with strong financial returns.

Keep in mind that investors can choose to allocate a percentage of their portfolio to specific goals. You could choose to allocate 5% of your portfolio to impact investing and 10% of your portfolio to ESG companies. Or you may choose to put 100% of your portfolio in ESG companies, with a small percentage allocated to specific sustainability goals. 

Creating a Personalize Impact Investment 

Sustainable financial and impact goals can offer significant long-term returns while promoting important causes. For this reason, investors are increasingly building a personalized, diverse impact investment portfolio that balances risk mitigation with specific goals. Along with traditional investment analysis, sustainable impact investing can offer strong portfolio performance with broad social and environmental rewards.

Frequently Asked Questions