The Five Myths Of Impact Investing

Carl Hazeley

12 months ago7:21 mins

The Five Myths Of Impact Investing

The Global Impact Investing Network estimates that more than $700 billion is now invested in the world’s impact funds, which aim to make investors money and have a positive impact on the world. But with so many myths going around, it’s worth separating fact from fiction before you step into this market-beating space.

Myth 1: Everyone’s agreed on what counts as an impact investment

Far from it: there’s no consensus for what counts as an impact investment, largely because there’s no single agreed-upon metric for impact. Some investors, for example, use IRIS, which considers what an investment will do, how many people it’ll help, and by how much. Others, meanwhile, prefer to put an “economic value” on a human life (it’s around $10 million for US citizens). But there’s no answer that’s right 100% of the time, which means each investment fund is ultimately making things up as it goes along.

Myth 2: Impact investing and ESG investing are one and the same

They actually aim to do very different things. Impact investing is all about generating positive outcomes, while ESG is more about how companies conduct themselves: it takes into account risks to the financial value of an investment from environmental, social, and governance factors.

Myth 3: Impact investing means backing companies labeled “impact-friendly”

Unfortunately not. Plenty of companies and funds have actually been incorrectly labeled as impact-friendly. Transparency issues are partly to blame, but so is “greenwashing”: the practice of making investments sound environmentally or impact friendly to attract capital.

Myth 4: Impact investing means avoiding companies that “do bad”

Some of the world’s biggest investors actually like to use an “engagement” strategy. In other words, they don’t necessarily sell off or avoid companies that are, say, poor employers or high polluters. Instead, they take a big enough stake in those companies to have a seat at the table, so they can push them toward positive change.

Myth 5: Impact investing means settling for poor returns

Financial gains and positive impacts are actually better aligned than ever before. Two-thirds of impact funds pursue competitive and market-beating returns, and the others may simply just have accepted below-market returns as a way of achieving their strategic objectives.

So what’s the opportunity here?

Many impact funds are listed on exchanges just like stocks, and they all have different criteria for investment: you might find one that focuses on solar energy firms, for instance, while another invests in recycling companies.

A good place to start is The Big Exchange’s impact fund summaries, where you can see funds ranked by impact or performance. Those ranked highest for impact include:

The Big Exchange top ranked funds

And while it pays to remember that past performance is not indicative of future returns, the following funds have been the best-performers over the past five years.

The Big Exchange best performing funds

It’s also up to you to pick funds that invest in areas you care about, but you’ll want to keep a couple of things in mind whichever way you go. For one thing, you’ll want to make sure you understand how exactly the fund defines impact investing, so you can decide whether that aligns with your values. And for another, it’s worth regularly revisiting your impact investments to make sure they’re still doing the good you want. As with all investing, a rating or investment view might change over time as companies shift and funds refocus.

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