Investing is often defined as putting money into schemes or ventures “with the expectation of achieving a profit”. But are financial returns the only way we can profit from investments?

For many of us, it’s just as important what our investments can do for our world as what they can for our bank accounts.

This week is World Investor Week, and we’re talking about impact investing.

Kate, a 26-year-old influencer from Auckland who runs the website Ethically Kate, was stunned in 2020 to realise her KiwiSaver was invested in companies that didn’t align with her values.

“I was really shocked when I became aware of my KiwiSaver. It felt so ironic that I was a sustainable influencer, trying to get people to shop sustainably but when I looked at my KiwiSaver, it was investing in all the things I disagreed with and didn’t want to support.”

This was the beginning of Kate’s impact investing journey. “It was very important to me to invest in companies that share my values. I researched my KiwiSaver provider, looked on Google and asked my friends and family about their KiwiSaver.

“The provider I went with was really new at the time. I was one of the first people I think, so I knew I was taking a financial risk, but it was really important to me. The returns I've been really happy with. It was a good move.”

What is impact investing?

Impact investing is when you make investments with the goal of a positive and measurable social, cultural, or environmental impact as well as a financial return.

This means you aren’t just avoiding ‘bad’ investments like fossil fuels, gambling or weapons, you’re actively choosing to invest in things that evoke positive change in the world.

Jo Kelly, Chief Executive of Toitū Tahua: Centre for Sustainable Finance believes impact investing is not an entirely new concept – it’s just a shift in mindset.

“Investors have always known that their investments have impact. It’s just that the main ‘impact’ they’ve been interested in – and lobbied hard to maximise – is short term financial returns to shareholders.

“Impact investment is about shifting mindsets from a focus on short-term financial impacts only, to long-term impacts to people and planet as well as pocket. In the context of climate, it’s also about recognising that climate risk is investment risk; climate risk is business risk.”

When you invest for impact, you’re essentially investing your dollar to vote for the future you want.

Your focus shifts from measuring the returns of an investment in financial terms only, to what it’s doing to help our world and society.

Long-term thinking is an investing superpower

When we invest for impact, we’re essentially killing two birds with one stone. We’re supporting a cause we believe in, while also helping our money grow.

When we think about the social, cultural and environmental impacts of our actions, we tend to shift our thinking to a more long-term perspective, which in and of itself is a financial superpower.

There is growing evidence that responsible investments do as well, if not better, than conventional investments. A 2015 analysis showed that in 90% of cases, companies with strong sustainability profiles either matched or outperformed their counterparts.

Forbes refer to it as “the most entrenched misconception” that ethical investing returns are not as high as those from conventional investing.

We invest more when we invest ethically

Have you ever noticed how you feel more motivated to do things that make you feel good?

We take up a sport, work late or volunteer despite there being no tangible reward, just because we enjoy the activity or believe in what we’re doing.

Intrinsic motivation is the force at play here – the same thing that drives us when we invest for impact. Intrinsic motivation encourages us to do things to feel personal satisfaction or enjoyment, rather than an external reward or punishment.

When we invest for impact, we are motivated by the feeling that we’re evoking positive change. It’s now proven that people tend to invest more money when they do it ethically.

The way forward?

According to the Global Impact Investing Network, the market for impact capital is currently $60 billion and could grow over the next decade to $2 trillion.

Jo Kelly is not surprised to see impact investing come into the mainstream.

“In the next 10 years, mainstream investing will become impact investing – not vice versa. It has to – for businesses and countries to make good on net carbon-zero pledges, and for humanity to have a chance of staving off the worst effects of climate change.”

Research from the Financial Markets Authority found 68% of Kiwi investors prefer to invest ethically and responsibly. But of those who prefer ethical investments, only 26% have selected a fund manager based on ethical credentials; 51% have not, and 23% have looked into it but not acted.

So while impact investing is on the rise, there’s still many of us who haven’t started (or don’t know how to get started) putting our money where our mouth is...

Where do I start?

How can we actually get started with impact investing?

You might be surprised to find out you’re already investing in ethical and sustainable funds through KiwiSaver. Mindful money’s investment and KiwiSaver fund checkers are great tools to help you explore the ethical makeup of different funds.

Impact investments are similar to any other investment, but with added focus on doing your research to understand the values and aspirations of the company.

You will have your own focus, depending on what social good you want to achieve. Our Sorted Investor Profiler tool can also help you find an investing strategy that suits you, by providing your risk profile based on your personality, situation and timeframe.

In Kate’s view, it will only become easier to invest for impact as it becomes more of a norm.

“We need to have sustainable values and think sustainably to continue existing. Even large corporates can’t deny it anymore. We’re seeing a lot of sustainable investment funds come out on top of the charts in terms of returns too.

“I think the lay of the land of investing going forward will be less of ‘I'm going to invest in this particular sustainable fund that’s not the worst’ and more of ‘who is actually the best of the best?’.”

Comment (1)

Gravatar for Dolf

Dolf

8:29pm | 7 Oct 2022

Impact or ethical investing still has to happen with today's fuels, materials and technologies. Disabuse yourself of the idea that there are investments that avoid all negative issues, whatever you judge them to be.

That is why a clear idea of your personal values hierarchy is important. It tells you when a fund or stock is too far out of alignment with what you value, conversely, are you prepared to go with the level of compromise you are making when you buy, because every buy will at some level compromise your ethical ideal.