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What Is Social Impact Investing?

Here is everything you need to know about social impact investing.

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The world of investing is complex and can seem nearly insurmountable if you are just entering it. By understanding the basic principles of investment readiness, however, you will open up a whole world of opportunities. A relatively recent phenomenon in the investment world is environmental and social impact investing. If you are interested in using your money to make efforts toward world conservation and the betterment of mankind, an understanding of impact investing will allow you to directly support the causes you hold most dear while also opening up the opportunity for you to improve your own financial situation. 

Like any type of investing, impact investments are not without their own risks, but the potential rewards—social, environmental, and monetary alike—are certainly considerable. If you are personally interested in contributing to an impact investing fund, joining a company or organization that is already involved in impact investing, or simply curious about what impact investing is, here is a brief rundown of everything you need to know about impact investments.

The Basics

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General impact investing is a broad term that describes any sort of investment, private or public, to an organization, company, or other entity with the goal of inciting progress toward social and environmental issues as well as receiving monetary or other financial returns. The definition is so broad because essentially any kind of investment can be considered an "impact investment" as long as the beneficiary is somehow involved in addressing environmental sustainability or social issues. While social and environmental issues often go hand-in-hand, it is important to understand that they are discrete realms, each with their own unique investment opportunities.

Environmental impact investing frequently involves investing in environmentally conscious companies or progressive industries and valuing the environment. These include organizations that support sustainable agriculture or renewable energy as well as environmental conservation groups. Environmental impact investments help provide the necessary capital for these and similar industries and organizations to work toward their goals of bettering the Earth's ecosystems. 

Social impact investing includes investments in socially responsible organizations such as those that provide services to people and small businesses. These organizations can be focused on just about any issue from handicapped accessibility to microcredit lenders that support small business owners. Many social impact investments support organizations that provide low-income housing, affordable healthcare, or progressive education opportunities.

The Best of Both Worlds

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Unlike more traditional forms of environmentally and socially responsible charity, social impact investing is not a one-way street. While charitable donations provide direct financial support to environmental conservation or social impact groups, they also provide—by definition—absolutely no financial returns or other financial benefits to the donor, so they are not a type of investment that gives the highest returns. (The one exception being that charitable donations typically provide the donor with a relatively minor tax exemption.) This sort of charitable support is of course very commendable, and without it, we would not have experienced many of the ecological and sociological improvements that have occurred in past years. Financially speaking, however, charitable donations offer only a one-sided benefit, and we shouldn't expect to rely on purely charitable contributions to provide sustainable growth to these progressive industries.

Impact investing, on the other hand, provides the best of both worlds. Not only does it provide financial support to socially and environmentally conscious companies and organizations, it also presents the opportunity for a reasonable financial return on investment in the future. The exact nature of the return is, of course, highly dependent on the market-savviness of the investor as well as their own personal intentions, but the potential is inarguably greater compared to a one-off donation. Environmental and social impact investing has been challenging the notion at monetary charitable donations are the best or only way to support environmental responsibility, social equality, and other issues.

Investments vs. Donations

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One may be inclined to think social impact investing is just a more selfish version of donating to a socially responsible charity, but the fact of the matter is that these investments, when properly handled, actually have the potential to be far more beneficial to all parties involved. Most charitable donations function as a one-time (or occasionally recurring) monetary gift to a single organization. While helpful and always good-natured, these singular monetary gifts have limited flexibility and next to no potential for growth.

Compared to one-off donations, environmental and social impact investments can offer much more flexibility as well as the opportunity for considerable financial growth. Depending upon the market and the industry, the investor can choose to make their investment in the form of venture capital or private equity instead of a straight cash investment. By buying or selling at concessionary or below-market rates, the investor also has control over how their investment develops over time, and can adjust it according to the market. It's one of the tips for successful long-term investing. Often, the investor takes an active role in monitoring the progress and effect of their investment as well. By measuring financial growth as well as the actual social or environmental impact of their investment, the investor ensures their money is helping form a better world.

Who should get involved?

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The idea of impact investing is relatively new, though investments in progressive organizations have existed for decades without a special name. As I've said, there is little difference between impact investing and other investing, and it's all about intention. Functionally, the act of investing with the intention of generating a positive social or environmental impact is the same as investing in anything else. And just like any other sort of investing market, the world of environmental and social impact investing is open to anyone with money to spend or capital to give. 

A wide variety of organizations are involved in some way or another with impact investing, including diversified financial institutions as well as religious institutions and private foundations. Individual investors are certainly a part of the impact investment ecosystem as well, whether by directly investing in a progressive organization or by contributing to a fund or a private foundation that is already established as an impact investor. If you have any interest in contributing in any way to environmental or social impact investing institutions, I encourage you to research the Global Impact Investing Network to learn more about how you can get involved.

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