A major part of life in 2017 is the increased emphasis on social and environmental responsibility. What a lot of people don’t know is that there has been tremendous growth in investing according to these goals in recent years as well. Impact and Sustainable Investing have burst onto the scene and preliminary research tells us they have potential to be much more than just a passing fad.
Are You Investing With Your Heart Or Your Head?
While the two can overlap, it is important to mind the differences between impact investing and sustainable investing. The key distinction is not in the investments themselves but rather, why you are investing in them. If you want your investments to support social, environmental, or morally sound companies you are an impact investor. Impact investors know there are likely better statistical outcomes to be had but they are more interested in supporting causes and they believe in a “what goes around comes around” philosophy in business.
On the more strategic side of this field is the sustainable investor. While a sustainable investor may be happy that their investments are supporting good, responsible companies, they are more interested in the outcomes that can be achieved for their portfolio by investing this way. If you think about the impact a sustainable and reliable inventory source can have on a company, it is not difficult to imagine the creative strategic advantages of investing in such companies.
What’s In It For Me?
If you are more intrigued with the sustainable investing model there are a few key strategies to keep in mind. The first is the potential for growth, particularly in the energy field. As the technology around sustainable energy improves, the possibilities are endless. For the time being, these companies also can provide a hedge against other investments. Just as your mutual fund portfolio benefits from diversity, investing in sustainable investments can shelter a portion of your risk against some of you more traditional investments in ways that were not available before. For example, if you are invested in things like coal, natural gas, or oil, investments in sustainable funds or companies could react inversely to those energy sources.
What’s the Catch?
As with many new investment trends the challenges that face impact and sustainable investments is the lack of historical data. This is noteworthy from a performance standpoint, as well as an evaluation and identification focus. When attempting to grade risk and performance, it is vital to look back at past trends. Predicting investment performance with strong accuracy is impossible, but looking at how it has reacted to various market trends in the past is essential when determining viability. Because they are so new, many of the funds and companies that make up the impact and sustainable investment strategies simply do not have a strong sample size of past data to evaluate. This carries with it a certain amount of unpredictability risk.
The second pitfall with the youth of impact and sustainable investing has more to do with how we measure and evaluate the investments that are put in this category. Simply put, what makes an investment socially or environmentally responsible, and what is the quantifiable correlation between this responsibility and our financial success as the investor? We continue to draw closer to these key answers, but until we are there we have to stomach some degree of uncertainty when investing in this way.