Global sustainable fund assets reached $2.74 trillion in the fourth quarter of 2021, according to Morningstar data, with more than 260 new ESG or sustainable fund launches during the quarter. While global impact investments stood at just $715 billion in 2020, many investors are looking for opportunities to make an impact beyond ESG funds.
Let’s look at how impact investing goes further than ESG and how investors make their portfolios more impactful.
Be sure to check out our ESG Channel to learn more.
ESG vs. Impact Investing
Most investors have heard the terms “ESG Investing” and “Impact Investing,” but they may not understand their differences. While ESG may help you invest more responsibly, it’s not the same as impact investing. ESG investing provides a set of screening criteria for investments, whereas impact investing is an entire strategy.
Many ESG funds take an underlying index, such as the S&P 500, and exclude securities that don’t meet environmental, social or governance criteria. For instance, the iShares ESG Aware MSCI USA ETF (ESGU) tracks the MSCI USA Index, which excludes tobacco, firearms, oil sands, and other companies engaged in activities that are considered classified as non-ESG.
Impact investments go a step further by actively seeking out companies making a positive change in the world. So, rather than investing in Apple because it’s not perceived as a bad company, an impact fund might instead choose to proactively invest in Brookfield Renewable Partners (BEP), one of the largest renewable power investors in the world with more than 20,000 megawatts capacity.
Impact Investing ETFs & Mutual Funds
Impact investing has historically been reserved for high-net-worth individuals. Fortunately, a combination of crowdfunding platforms and public investments has opened the door for non-accredited investors. These investments include everything from green bonds that support renewable energy to small business funding platforms.
Some impact investing ETFs include:
| Name | Ticker | Expense Ratio | Yield |
| iClimate Global Decarbonization Fund | 0.65% | 0% | |
| VanEck Green Bond ETF | GRNB | 0.20% | 2.07% |
| iShares Green Bond ETF | BGRN | 0.20% | 0.82% |
| ImpactShares Affordable Housing MBS ETF | OWNS | 0.30% | 1.95% |
| Engine No. 1 Transform 500 ETF | VOTE | 0.05% | 0% |
| JPMorgan Climate Change Solutions ETF | TEMP | 0.49% | 0.89% |
| VanEck HIP Sustainable Muni ETF | SMI | 0.24% | 1.46% |
Some impact investing mutual funds include:
| Name | Ticker | Expense Ratio | Yield |
| TIAA-CREF Core Impact Bond Fund | TSBRX | 0.61% | 1% |
| Access Capital Community Investment Fund | ACASX | 0.80% | 1.57% |
Investors must go beyond financial performance and ESG screening criteria when evaluating impact investments. For example, you might want to consider how the portfolio aligns with your impact goals and whether the companies in a portfolio have “additionality.” In other words, are they doing things that simply wouldn’t happen on their own?
Private Impact Investing Opportunities
Publicly-traded ETFs and mutual funds are limited to what individual stocks, bonds and other securities offer. As a result, many impact investors prefer to invest in private investments to make a larger impact. For instance, you can invest directly in an affordable housing project, sustainable farm, or other causes.
Some popular private impact investment platforms:
- SmallChange makes it easier to invest in affordable housing and other real estate projects. These deals might be structured as debt or equity with various payment terms and maturities.
- GoSteward enables anyone to lend to sustainably-run farms, ranches, fisheries and other services. The deals are typically structured as loans with competitive interest rates.
- RaiseGreen provides access to various clean energy deals. Often, these are structured as preferred equity.
- Energea makes it easier for anyone to invest in solar farms worldwide, earning money from long-term offtake agreements.
- Renewables makes it easier to invest in renewable energy projects with an attractive interest rate.
Investors should keep in mind that federal regulations limit how much they can invest in private companies. In general, Regulation CF permits you to invest up to 10% of your net worth in private companies. But, of course, it’s equally important to ensure that private investments fit within your risk-and-return expectations to avoid any surprises.
Be sure to check our Portfolio Management Channel to learn more about different portfolio rebalancing strategies.
The Bottom Line
Most investors are familiar with ESG investing, but they may want to consider going a step further to maximize their impact. Rather than just excluding “bad” companies, impact investments enable you to invest exclusively in companies actively solving problems – and in many cases, they offer competitive risk-and-return characteristics.
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