Money is a completely made-up, invented resource. In the modern era, we literally create money out of thin air—and increasingly, it doesn’t even require any sort of physical presence. Vast fortunes are represented by ones and zeroes on humming servers, and even the values of currencies bob and weave according to strange algorithms few people truly understand.
Our relationship with money is also strange. Some of the least important folks in our society get paid the most, while those who serve as the backbone of civilization are paid the least. It’s little wonder that most of us tend to think of money like The Force in Star Wars: The dark side is obviously more powerful. We all assume Darth Vader will always win, though we’d like to imagine we’re Obi-Wan Kenobi. We apply that cynicism to the concept of impact investing, or the strategy of investing in order to trigger specific, beneficial social or environmental changes in society. The assumption is that while impact investing might be laudable, it can’t possibly make you as rich as investing in, say, Soylent Green, Inc.
But is that really true? It’s always easier to assume the worst, in part because assuming things like impact investing are futile gives us an excuse not to do anything. If there’s a perceived penalty for trying to make the world a better place with our money, we have every reason not to bother. At the same time, advocates of the strategy often argue that impact investing actually does better than less ethical approaches. The truth is a little more complicated.
More data comes from impact investing
The first thing to understand is that impact investing is not a monolith. Impact investors have different strategies and goals. Some are focused entirely on the impact, and are willing to accept lower returns if they get the change they’re hoping for, but many impact investors are as focused on profit as anything else. In fact, many impact investors have fiduciary responsibilities that require them to seek the greatest returns on their investment strategies. That means finding a balance between pushing change and growing capital. Impact investors can also pursue different levels of friction: Some focus on supporting companies and policies that are in line with their goals, while others pursue an “engagement” strategy, accumulating large stakes in companies they wish to steer toward positive change.
In fact, impact investing is often seen as a benefit for one simple reason: It increases the amount of data being taken into account. Investing is a game of information: The more you understand a sector and the more data you have about what’s happening in it, the better your chances of making smart decisions and banking huge returns are. Whatever your goals as an investor, having more data is always a good thing.
This is key because environmental, social, and governance (ESG) concepts are an increasingly important trend in the world. That means that knowing the impact of your investments in the ESG sphere is vital to knowing what the return might be, regardless of your personal interest in being an activist investor.
Don’t be evil
So impact investing isn’t charity—but it also isn’t magic. While it’s true that in the early days of the concept, impact investing tended to require a compromise in terms of returns, the data has since improved and the strategies have refined, so that is no longer the case. The returns from impact investments are largely on par with traditional approaches. In fact, some impact investing benchmarks show that impact investment strategies tend to outperform more traditional approaches—although not consistently, and not by a large margin.
But like any investment, there is risk involved. Impact investing doesn’t come with any “ethical bonus” that guarantees or inflates returns. Most impact investors still prioritize the “impact” portion of their investments, but richer data and smarter analysis have made it possible to try and steer the world to a better place without necessarily eroding your returns.
Of course, as a freelance writer, my impact investing tends to focus on tipping my local bartender well. So far, the returns have been satisfactory.