Impact Investing: Using Wealth to Give Back
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Table of Contents
What is Impact Investing?
Key Sectors for Impact Investing
Benefits of Impact Investing
Challenges in Impact Investing
How to Get Started with Impact Investing
Finding Balance in Impact Investing
Philanthropy investing reflects not only personal values but also larger questions about wealth, purpose, and the impact one hopes to make. With impact investing, investors are achieving two goals at once; making a positive difference while also generating financial returns.
According to the Global Impact Investing Network (GIIN), impact investing is a $1.5 trillion industry as of 2024, and that number continues to grow annually. With the rise in environmental, social, and governance (ESG) awareness, high-net-worth individuals are seeing opportunities to support causes they care about while simultaneously pursuing favorable returns.
What is Impact Investing?
The Rockefeller Foundation coined the term “impact investing” in 2007 as a way to describe investment strategies that aim to generate returns while also making a positive impact. It offers investors a way to align their capital with personal values, channeling funds into areas such as clean energy, sustainable agriculture, affordable housing, education, healthcare, and more.
At a basic level, this means investors consider the moral ramifications of any investments they make. Impact investors may choose to support industries such as healthcare, education, or environmental organizations. Conversely, these investors may purposely avoid investments that do not align with their moral compass—for example, companies associated with selling firearms or tobacco—even if the investment would be financially sound.
It is important to note that impact investing can certainly involve philanthropic donations but is different in the sense that it is done strategically with the goal of also realizing positive financial returns. And this strategy often pays off; according to a 2020 survey, over 88% of impact investors reported that their investments were meeting or exceeding financial expectations. Generally, returns in impact investing can range from market-rate to below-market-rate, with each investor deciding on the level of return they are comfortable with relative to their impact goals. Given that it supports good causes, investors may be content with lower returns.
Key Sectors for Impact Investing
Renewable Energy
With the need to transition to clean energy sources, renewable energy remains one of the most popular sectors for impact investors. Investments in wind, solar, and hydroelectric projects help reduce reliance on fossil fuels, mitigate climate change, and foster sustainable energy solutions. Renewable energy companies often provide both significant growth potential and opportunities for investors to drive change in one of the most pressing global issues.
Sustainable Agriculture and Food Security
The agriculture sector is a major source of greenhouse gas emissions and is closely linked to global food security. Investing in sustainable agriculture can help address environmental degradation, biodiversity loss, and food scarcity. Investments in this sector may target companies focused on regenerative farming, sustainable food production, and innovative food technologies, which seek to increase productivity and reduce environmental impact.
Healthcare and Access to Medicine
High-net-worth individuals can invest in healthcare innovations that address diseases prevalent in underserved communities, support affordable treatment options, and improve healthcare delivery infrastructure. This sector can also include investments in mental health, nutrition, and health technology startups that aim to bridge healthcare gaps globally.
Affordable Housing and Community Development
Impact investing in affordable housing not only contributes to social welfare but can also provide steady returns. By investing in housing development projects, investors help create jobs, stabilize communities, and enhance economic growth in underserved regions. Community development projects that target infrastructure improvements, educational facilities, and local business development are also part of this sector.
Education and Workforce Development
High-net-worth individuals can support organizations focused on expanding access to quality education, vocational training, and workforce development programs that equip people with the skills needed in today’s job market.
Benefits of Impact Investing
Alignment with Personal Values
With impact investing, high-net-worth individuals can align their investments with their values, fostering a sense of purpose. By supporting sectors and causes close to their hearts, high-net-worth investors can gain a deeper connection to their investment portfolios.
Legacy and Reputation
For many high-net-worth individuals, impact investing is part of their broader legacy and reputation-building efforts. Supporting sustainable and socially responsible initiatives can enhance one’s standing as a conscientious investor, thereby positively influencing public perception. Impact investing can also provide families with a framework to discuss philanthropy and financial priorities across generations, promoting a lasting legacy of responsibility.
Diversification Opportunities
Impact investing offers high-net-worth individuals a new way to diversify their portfolios. Sectors such as renewable energy and healthcare may not be as heavily correlated with traditional markets, allowing investors to spread their risk across diverse areas. This diversification can help protect portfolios from market volatility and expose investors to high-growth sectors that conventional investments might overlook.
Targeting emerging market opportunities that may not be readily available in traditional financial markets provides not only diversification but also the potential for strong returns as these regions develop and stabilize.
Tax Benefits
In many jurisdictions, impact investing can provide tax advantages. For instance, donating appreciated assets or setting up a donor-advised fund (DAF) to support impact-focused initiatives can reduce tax liabilities. High-net-worth individuals should consult tax advisors to understand the specific implications of impact investments in their region and develop a targeted high-net-worth tax strategy.
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Challenges in Impact Investing
Measurement and Accountability
Accurately measuring and tracking the social and environmental outcomes of investments can be challenging. Unlike traditional financial metrics, impact measurement often requires customized methodologies, which can be time-consuming and may lack standardization. Investors should look for funds and companies that adhere to recognized frameworks, such as the UN Sustainable Development Goals (SDGs) or the GIIN’s IRIS+ system, to effectively gauge impact.
Higher Due Diligence Requirements
Impact investing demands a rigorous approach to due diligence, especially in sectors that may involve startup ventures or emerging markets. Assessing both the financial viability and the impact potential of investments can be complex and resource-intensive.
Potential for Lower Liquidity
Many impact investments, particularly those in private equity or real estate, have longer lock-up periods and lower liquidity than traditional investments. High-net-worth individuals must be prepared for longer holding periods and should plan their cash flow accordingly. Understanding the liquidity profile of impact investments before committing capital can prevent unexpected disruptions in the investor’s broader financial plan.
Risk of Impact Washing
As impact investing grows in popularity, so does the risk of "impact washing," where companies or funds falsely claim impact-oriented goals to attract capital. This misrepresentation can make it challenging for investors to identify authentic impact opportunities. Investors should scrutinize potential investments to ensure transparency and alignment with genuine social or environmental objectives.
How to Get Started with Impact Investing
For high-net-worth individuals interested in impact investing, there are multiple avenues to begin:
Consulting with Financial Advisors
Specialized financial advisors with experience in impact investing can help investors identify appropriate opportunities based on their financial goals and values. Advisors can also assist in conducting due diligence, structuring investments for tax efficiency, and measuring impact outcomes.
Donor-Advised Funds (DAFs)
DAFs allow investors to allocate funds to impact initiatives while benefiting from tax deductions. By donating appreciated assets or cash into a DAF, high-net-worth individuals can streamline their philanthropic giving and select projects that align with their values. DAFs also offer the flexibility to fund initiatives over time, enabling investors to support both immediate and future impact goals.
Impact-Focused Funds
Several private equity and mutual funds are dedicated exclusively to impact investing, allowing for investments through a professionally managed vehicle. These funds typically provide a balanced portfolio that aligns with specific social or environmental themes, giving investors exposure to a diversified set of impact opportunities.
Direct Investments
For those who want more control over their impact investments, direct investments in companies or projects is an option. While this approach allows investors to select exactly where their money goes, it also requires more research, due diligence, and potentially a hands-on management approach.
For example, angel investing naturally aligns well with impact investing, as angel investors are, by definition, using wealth to support burgeoning businesses. Putting an impact investing spin on angel investing means conducting thorough due diligence to assess the values of the company and how its business will impact the wider world.
Family Offices
Family office impact investing—where family offices managing wealth for high-net-worth families incorporate impact investing principles—is another common strategy. While traditional family office investing prioritizes risk management and wealth preservation and growth, this path adds a socially responsible layer that also builds a legacy of giving back.
It is generally recommended to start out conservative when first exploring the world of impact investing. Starting with 5% to 10% of total investable assets will kick off the journey while giving time to get used to the new strategy.
Finding Balance in Impact Investing
Impact investing combines the potential for attractive returns with the satisfaction of contributing to lasting change, making it an ideal option for high-net-worth individuals looking to create both personal and global value. Their capital can drive transformative change in critical areas like renewable energy, affordable healthcare, and sustainable agriculture, contributing to a more equitable and sustainable world.
Interested in discussing topics such as impact investing and philanthropy with other high-net-worth individuals? The Long Angle community facilitates insightful conversations, as well as educational and social events, focused peer groups, and curated investment opportunities. Join Long Angle to get started.
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