Today, we’re all familiar with the phrase investment, but few of us know what it means. For us, it implies putting money away in order to generate returns or earn a profit in the future. But it is much more complex than that. As a society, we invest in many ways, from our pension to our savings to stocks and bonds. Each investment strategy has its pros and cons. But an even more complex strategy is taking those investments and generating a positive social or environmental impact.
Sustainable, responsible, and impact investing (SRI) refer to techniques that help investors put their money to work in ways that make the world a better, more sustainable place. The investment world is trying to move beyond simply thinking about investment return.
What is Sustainable Investing?
Sustainable investing is a type of investing that emphasizes social and environmental impact. It often includes investing in companies or funds that demonstrate environmental and social benefits, utilize sustainable business practices, or donate a portion of their profits to environmental causes. You can also invest in companies or funds that track, measure, or manage their environmental impact as part of their overall business strategy.
The idea is that environmentally harmful practices, such as mining, oil and gas extraction, and deforestation can negatively impact people and the planet. So, how can sustainable investing help? By shifting the investment portfolio away from investments that cause harm to the environment and toward investments that will profit not only the company but the planet in the longer term.
What is Responsible Investing?
Responsible Investing (RI) is a broad term that encompasses various investment strategies. While RI includes investments in companies, it also encompasses issues such as corporate responsibility and sustainability and investing for the long term.
Diversifying your portfolio is a great way to lower the risk of investing in the stock market. Diversification simply means spreading your investments out across different types of — not just stocks, bonds, and cash, but also real estate, art, and even collectibles (like baseball cards). However, not all of them are created equal. Some are riskier than others. Some return even better returns than others. In fact, some of them are downright harmful. Responsible investing is the practice of choosing investments that align with your values instead of blindly following a portfolio’s performance.
What is Impact Investing?
Impact investing is the key word here. Simply put, impact investing is investing with the purpose of generating positive social, environmental, or economic impact alongside a financial return. It is a method of investing that involves your money having a positive impact on society and the environment. When deciding where to invest your money, you have the option of choosing investments that align with your personal values, as opposed to simply looking for the best return.
For example, a food company is more sustainable and environmentally friendly than its competitors. Or a tech company that helps women earn an income or uses software similar to greenstone to keep their impact on the environment at a minimum. Or a nonprofit that’s funding new approaches to ending poverty. Impact investing may focus on for-profit companies or businesses owned by social or nonprofit entities. With many people looking for ways to build wealth without putting money into the stock market, it may be a viable option. It is a socially responsible investment philosophy. It is based on the belief that capital markets have a moral responsibility and should be leveraged for a positive impact on society, the environment, and the economy.
Hence, many financial advisors are advising their clients to stay focused on their long-term investments. Sustainable responsible and impact investing only began to gain critical mass in 2016. Investors are learning about the potential benefits to their bottom line. Additionally, many of them are concerned about the negative social and environmental impact of a “do nothing” approach.