Impact investing—in which social and environmental performance is considered on par with financial performance–has become an increasingly popular investment approach in the last few years.
According to a Global Impact Investing Network report, the impact-investing sector has doubled in size over the past couple years. Moreover, impact investors say their impact investing allocations will continue to grow.
Younger generations especially are drawn to impact investing because they see no reason to separate philanthropy from investing. That said, it’s not just young investors who have spiked impact investing’s growth. The number of impact investors is rising across all demographic categories. Of note, 72 percent of the U.S. population expressed interest in sustainable investing.
However, due to the large number of socially responsible investment offerings in the marketplace, people looking to positively impact society with their investments may not know where to start when vetting potential impact investments.
Shifting the Focus
While it’s easy to choose the bigger, well-known companies pursuing sustainable initiatives, it’s worth the time (and investment) to find small, growing, for-profit impact companies that are effectively addressing social and environmental problems in the world (i.e., the climate crisis, hazardous waste, poverty, etc.).
When reviewing these companies, some criteria to keep in mind include:
- Social and Environmental Focus—Companies striving for measurable, positive impact toward a social or environmental problem
- Managerial Health—Companies with a strong management team and sound board leadership
- Profitability—Positive profit margins or viable potential for profit within a reasonable period of time
- Transparency & Accountability—Measurable impact shown through finance, policy and information sharing
When it comes to effective impact investing, you’ll want to look beyond traditional investment analysis and extend into data-driven evaluation and measurement of positive indicators of social or environmental impact. As such, I’ve developed a formula to help us at CoPeace develop quantifiable social and environmental targets, elements of which can be used by individual investors to identify impact investments that will make a difference and guarantee competitive financial returns.
Head + Heart + Math Model
Called the “Head + Heart + Math” model, this three-prong process helps effectively identify companies with sustainable business models that are making a measurable impact. In short, this model consists of the following:
Head (Research): This includes exploring the company’s website and other media platforms, related articles, product or service concept, general business model, customer relations and other operational concepts.
Heart (Impact): Look into the company’s executives to get a better understanding of their interests and values. This in turn will give you insight into their relatability and how they run the company. This step also involves looking deeper into the company’s demonstratable social or environmental impact, and if their goal/mission speaks to you.
Math (Analysis): This part is a bit harder without the help of a financial professional, but you’ll want to look into any public financial documents, such as financial projections and budgets to assess the company’s financial viability, including determining degree of profitability and identifying risks to measure the company’s current and future success.
By following this method you’ll find yourself making true impact investments, as opposed to investments in “socially responsible” mutual funds and ETFs. “Socially responsible” or “green” mutual funds and exchange-traded funds (ETFs) invest in selected companies doing some good things, but still negatively impacting society in other ways.