Everyone Can Be an Impact Investor -- Here's How to Start

06/02/2015 01:04 am ET | Updated Jun 01, 2016

The movement toward investing in what's good instead of just screening out what's bad is growing, spurred by a new generation of investors.

Millennials are questioning conventional systems and approaches across the board, from food to education to finance. That's leading many to start aligning personal and family investments with their values. A recent Morgan Stanley Institute for Sustainable Investing poll found that millennial investors and women generally are the most likely to invest for impact. Overall, 71 percent of individual investors are interested in sustainable investing, defined as "making investments in companies or funds that aim to achieve market-rate financial returns while pursuing positive social and/or environmental impact."

Interest is not the same as action, however -- many people quickly confront barriers when they seek to invest for social and environmental benefits as well as financial returns. In conversations with investors across the spectrum, from high-net-worth individuals to people with relatively modest amounts to invest, I've found that people often feel uncertain about how to get started and about how to evaluate their options. Answering the following questions is an essential first step for would-be impact investors.

What kind of impact do you want your money to have in the world?

While the term "impact investing" has come to mean positive social and environmental impact, in truth all investments have an impact. Are your current investments having the impact you want? What do you want your impact to be? What issues are most important to you?

Some people focus on a particular area; others act across many interest areas. I know a woman who has oriented her whole portfolio toward soil health. Another woman, on the cusp of a significant inheritance at 35, ended up tossing aside the conventional investing framework and developing her own framework, which prioritizes planetary health. Yet another has moved 100 percent of her family foundation's assets to investments in social justice and environmental sustainability. She's also a big supporter of education because she believes it's a key factor in initiating change.

What barriers will you have to deal with?

Impact investors often face resistance from relatives and investment advisors. You need to be prepared for negative reactions -- we often hear from people whose investment advisors think they don't know what they're talking about, or who struggle with family members who are afraid to move away from conventional approaches. Even people who have sole and complete control of their money often feel conflicted about challenging conventional finance thinking. Most people need to spend some time thoroughly educating themselves, partly so that they can educate others. And investors who have money in trusts or family offices should expect a long-term effort -- those can be slow ships to turn.

How much risk can you tolerate, and how hands-on do you want to be?

Potential impact investors often wonder, "Do I have to give up all of my return to have an impact?" The answer is no, but we suggest people ask themselves, "What is a sustainable return? What is enough? Where can I start taking more risk?"

There are avenues for impact investing across the spectrum of investment types. One of our clients provides early stage capital, the riskiest choice, because she knows how hard that is to find and thinks she can create a better future for her grandchildren by supporting social enterprises than she can through the stock market. She's definitely getting her hands dirty. Investors like her typically work through investment circles or community-based advisors.

Other investors prefer a structured, pooled investment product such as a fund. Once you've done the initial work of evaluating the fund and the manager, these funds just require the low-level effort of monitoring.

Non-accredited investors have fewer choices, but those options are expanding. It's now economically sound for people to create customized mutual funds, and big finance players are launching their own impact funds. A caution here: You have to investigate the holdings in these funds to be sure they're meeting your definition of impact, as many of them are impact "lite." Some crowdfunding and peer-to-peer funding platforms also offer impact investment opportunities to people with small amounts to invest.

Have you considered all of your funds?

People often don't think about the money they have in banks or in short-term instruments such as CDs from an impact perspective. But whether you're parking money while seeking an investment or simply maintaining a deposit account, the bank is investing that money. Do you like what your bank is funding? If not, consider credit unions, community development financial institutions, or members of the Global Alliance for Banking on Values.

There are opportunities for a wide range of people to make direct impact investments with liquid capital. For example, RSF Social Finance's Social Investment Fund has only a $1,000 minimum investment and provides CD-like returns with a three-month term. Investors even have the opportunity, through quarterly pricing meetings, to meet the borrowers they are funding.

People with substantial wealth often overlook philanthropic dollars as an impact category. Many family foundations have endowments invested in ways that run counter to the foundation's mission. This is often the most natural place to start with impact investing -- the funds have already been dedicated to a social purpose, and maximizing total fund impact is a compelling goal.

What are you waiting for?

Impact investing does take thought and planning, but there are now so many ways to get into it that anyone can find a path that works. If you have substantial assets and a mix of investment and philanthropic funds -- and thus a complicated portfolio -- the biggest kick-start may be a like-minded group that can provide inspiration and knowledge. The recent Play BIG gathering, an annual event that brings high-net-worth individuals together to share impact investing experiences and develop strategies, brought this point home for me. One of the participants attended three years ago with no knowledge of impact investing and an uncertain commitment to it; this year she presented a serious plan to shift her family's foundation to 100 percent impact investment. The lesson: just take a step.

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