What Is Impact Investing?

Impact investing occurs when investors place capital in companies that will generate financial returns along with meeting socially responsible goals. This investment strategy helps investors avoid companies they believe act immorally or irresponsibly in the business environment. For example, investing in cigarette or alcohol production companies do not typically meet impact investing standards. This strategy is also a form of triple bottom line investing. Investors focus on financial, ecological, and social aspects of companies when researching investment opportunities.

Another aspect of impact investing is the review of people, planet, and profit. All companies typically have an impact on these three elements. People represent the human capital a company either employs or indirectly affect through business practices. Indirect people include community members and external stakeholders that rely on the business, such as suppliers. Companies that routinely ignore these groups are often seen as an undesirable investment under social and moral standards.

Planet is the natural capital a company uses during its business operations. The surrounding environment can include natural resources as well as the flora and fauna in the community. While all companies can have an environmental impact, certain industries are more prone to environmental damages than others. For example, mining, oil drilling, and timber companies can strip natural resources from the planet. Impact investing may require individuals to avoid these businesses when making investments.

Profit is often at the bottom of the triple bottom line theory. Profit is the economic gain a company experiences from its natural activities. Investors make personal gains when a company increases profit. The company can either repay this profit to investors as dividends or retain it in the business, increasing operational output. While impact investing strategies seek to maximize an investor’s gain, it does not do so at the cost of people and planet.

Many companies engage in some form of corporate social responsibility. These activities can include community improvements, natural resource replenishment, and avoidance of questionable business activities. Unfortunately, these activities often result in lower profits. Any money spent on socially responsible activities often comes from the pockets of all investors, not just those who believe in impact investing. Investors solely concerned with making money can wind up pulling their investments from the company in order to find more profitable ventures.

Socially responsible investing may also be tough to continue in the long term. Many companies engage in numerous activities investors may see as inappropriate. Impact investors may need to remove invested funds whenever a company engages in these activities, regardless of profit made or lost.