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 with examples? ›

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.

What is the difference between ESG and impact investing? ›

Impact investing is more focused and deliberate in seeking investments with a specific social or environmental outcome. In contrast, ESG investing considers a company's ESG factors and traditional financial metrics. This is one of the main differences between ESG and Impact investing.

What are the cons of impact investing? ›

With inclusionary investing, there is the danger that you mis-identify the companies capable of doing good, and flood these companies with too much capital. Not only is capital invested in these companies wasted, but increases the barriers to better alternatives to doing good.

Is impact investing profitable? ›

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.

Why do people do impact investing? ›

Impact investing is part of a growing trend of socially responsible practices that seek to reduce some of the negative consequences of traditional business activities.

How much can you make in impact investing? ›

Impact Investing Salary in California
Annual SalaryMonthly Pay
Top Earners$138,560$11,546
75th Percentile$90,089$7,507
Average$71,249$5,937
25th Percentile$39,169$3,264

Why is impact investing becoming popular? ›

The growing impact investment market provides capital to address the world's most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.

Is impact investing ethical? ›

While it is crucial to consider the operation and implementation of impact-oriented financial products, the ethical basis of impact investing is no less critical to its success. As the word 'impact' suggests, this kind of ethical finance is frequently justified on the basis of its measurable outcomes.

What are the three components of impact investing? ›

The expectation of a financial return; The intention to tackle social or environmental challenges; A commitment to measuring and reporting against the intended social or environmental impact.

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 do I get started in impact investing? ›

  1. Start the conversation. There may be others involved in your decisions about how you invest—a wealth manager or financial advisor, a spouse or other family member. ...
  2. Expect a return. ...
  3. Start small—and start now. ...
  4. Explore impact investing today.

Do investors care about impact? ›

We observe that investors are willing to pay for investments with impact. Of all investors, 93% prefer the sustainable option when fees are equal in the two funds.

What do impact investors do differently? ›

By definition, impact investing means doing something different. Traditional investors focus on financial returns; impact investors must make an intentional 'contribution' to measurable social and environmental outcomes.

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. It has emerged as a significant opportunity to mobilize capital into investments that target measurable positive social, economic, or environmental impact alongside financial returns.

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