Are you ready to take the plunge and start your impact investing journey? Impact investing is a great way to use your money to make a positive difference. You can invest in companies making an environmental, social, or economic impact. With the proper knowledge and tools, you can jumpstart your impact investing journey today! In this article, we’ll show you how to get started.
How to Start Impact Investing
Step 1: Do Your Research
Before becoming an impact investor, you need to understand the fundamentals. This includes terminologies, the types of investment vehicles, and where to invest. Various resources are available to learn about these things, from online articles, websites like Investopedia, webinars, and even this recently held sustainable finance event.
When you understand the fundamentals, you will find it easier to choose an investment vehicle that best suits your investment goals and values.
Step 2: Understand Your Investment Goals
Once you understand impact investing and its workings, it’s time to set your goals. Since impact investing involves investing for both financial and social/environmental returns, you need to know what your investment goals are for both these areas.
For instance, what are the most passionate causes you want to support? Are there any specific environmental issues you want to invest in? Consider these while researching investment options that match your goals.
Step 3: Choose an Investment Vehicle
At this stage, you need to choose an investment vehicle that suits your financial and investment goals. Here are some investment vehicles that can be used for impact investing:
- Mutual Funds and ETFs: These are investment vehicles that pool together the money of many investors and invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds and ETFs are available that focus on socially responsible or impact investing themes, such as renewable energy, affordable housing, or education.
- Private Equity and Venture Capital: Private equity and venture capital firms invest in private companies, often at the early stages of their development. Some private equity and venture capital firms focus on impact investing, investing in companies working to solve social or environmental problems.
- Community Development Financial Institutions (CDFIs): CDFIs are financial institutions that provide loans, investments, and financial services to underserved communities and individuals to promote economic development and social change. CDFIs can be a good option for impact investors looking to make a direct impact through their investments.
- Social Impact Bonds: Social impact bonds are a type of investment vehicle that allows investors to fund social programs to generate measurable social outcomes. The government or a nonprofit organization pays the investors back based on the program’s success.
- Sustainable, Responsible, and Impact Investing (SRI) Funds: SRI funds are mutual funds or ETFs that focus on investing in companies that positively impact society and the environment. SRI funds may also consider social and environmental factors in their investment decisions.
Step 4: Assess Risk and Diversify Your Portfolio
Once you have selected an investment vehicle, the next step is to assess your investment and portfolio risk. This will help you decide whether to invest in one or several funds or opt for a more diverse portfolio. Your risk profile will depend on your financial goals, time horizon, and other investment factors.
Keep in mind that diversification can lower your risk but may also reduce your potential return. So choose your investment vehicle carefully based on your goals, risk profile, and investment time horizon. If you plan on investing in multiple funds, make sure your portfolio is diversified across funds in different industries and regions to reduce risk.
Once you assess your investment risk and diversification needs, the next step is to invest your money wisely in individual funds that match your risk profile and goals.
Step 5: Manage Your Investments
Any investment involves some level of risk. Before you start investing, you must understand the risks involved. Getting a second opinion can also help you understand investment risks and select the right investment vehicle to help you meet your financial goals.
Start Making a Difference Today
Impact investing is a great way to invest your money and help address social and environmental problems. Start understanding how impact investing works today and choose the vehicle that suits your goals.