46. Three Phases of Impact Investing

Welcome to Spend Donate Invest. This is a podcast where you’ll find short episodes about how we might use our money in ways that line up with our personal values and the type of world you’d like to help create. Maybe your thing is climate change. Maybe it’s poverty. Maybe it’s the gender pay gap. Maybe it’s reproductive freedom. You can choose your own values, the idea here is that you will get some suggestions on lining up your money and your values. We talk about where you shop, where you’re investing, and even where you keep your cash. Today someone wrote in about socially responsible investing, you can send in whatever question you’ve been thinking about. I’d love to chat about it, and share some resources that might send you in the right direction to achieve whatever your heart desires.

Here’s this week’s letter:
I’m somewhat new to investing in general, I’ve always put money into my 401k because my company matches, but I’ve started to invest outside of the 401k. For now, I’m looking at mutual funds, ETFs, maybe a few individual stocks, but I’m still pretty beginner level. I have heard you talk about social impact investing, is that something for small time investors like me or is it for the rich people of the world?

Thanks so much for this letter! Social impact investing, as you called it, is for all investors, whether you are investing in a 401k at your job (or a 403b if you work at a nonprofit) or the equivalent for your country, I know there are some international listeners to the show. I’m talking about people whose employers offer some sort of company sponsored retirement program. Typically there are a very limited number of options of bundles of stocks that you can choose. Like a conservative option and then a riskier option for people who are farther away from retirement age. With those, you typically don’t get to choose individual stocks that you are investing into. It is not common at all that employers offer socially responsible options, for example a mutual fund that excludes environmentally harmful companies. But there’s some good news on that front- you can lobby your company to start to offer some socially responsible options. Check out episode 9 which has some tips on how to get your company to start to offer some better options.

But you mentioned in your letter that you’ve started to invest on your own as well. That is exciting! A little more control from the driver’s seat. You asked if there’s an opportunity there to think about your values as you start to shape your investing strategy and the answer is YES!

There are 3 phases that investment professionals usually talk about when it comes to impact investing. The first phase is where you are screening out companies that are against your values. For example, maybe you are anti-tobacco. You can make sure you don’t pick any stocks or mutual funds or ETFs or Index Funds with tobacco companies in there. That’s phase one- screening out.

Phase 2 is where you include stocks that are doing some good without sacrificing any profits at all. Your top priority is getting the absolute most money that you can make from your investment, but if you have a choice between a company that is harmful to people or the planet and a company that doesn’t treat people or the earth as poorly and both of those companies make you pretty much the same amount of profit, you’re going to go with the better company. That’s phase 2. If you are familiar with ESG, that’s a risk rating that covers the environmental, social and governance risk, you could look for a stock with a lower ESG risk rating. You’re still focused on squeezing out every penny of profits that you can get from your investments, but you choose companies that lean more positively in terms of the type of impact they have on the world.

Then there is phase 3 of impact investing. This is where your top priority isn’t squeezing out every single penny of profit that you can get. You do want to make money from your investment, but what’s more important to you is the impact of your investment. This is where you are investing in companies that are coming up with solutions. For example, you might find a company that is doing something innovative with a climate solution. Maybe they came up with a new technology that can clean up our oceans. You invest in those companies. These are companies that are proactively coming up with ideas and solutions for our future. You are voting with your investment dollars trying to power companies that are coming up with good solutions.

So those are the 3 phases. When you first start out, you can start with phase 1 where you weed out the biggest offenders. Then when you’re ready you can start to move into phase 2, this is where your biggest motivator is profit, but you are including stocks that are doing some sort of stakeholder analysis, maybe they’re doing an ESG risk rating, or some other way of applying an impact lens to measuring their impact on the planet and it’s people. And then finally, phase 3 is where impact is the most important thing to you and so you are investing in companies that are proactively putting solutions out into the world. Like a company I was just hearing about recently that is making clothes that are completely biodegradable. Phase 1 impact investing would be to remove fast fashion companies out of your portfolio, phase 2 might be to look for a fashion company that is actually measuring their climate and people impact for example through a favorable ESG risk rating. And phase 3 of impact investing would be actually buying stock in this company that makes the biodegradable clothing. Do you see how that works from phase 1 to 2 to 3?

By the way, the name of that company that makes the biodegradable clothing is Unless Collective. I’m going to include their link in the show notes. I’m not even sure if they are a publicly traded company, and I’m definitely not suggesting you invest in them, I’m just trying to explain an example of a company that is proactively coming up with a solution to a problem our world is facing- the harmful effects of fast fashion.

Thanks for joining for today’s discussion. Today’s question was about getting started as an impact investor, but you might have a different question. Maybe you’ve been thinking about what you’re doing with your cash, or how you’ve been shopping. Or something else entirely about our money and our values. Feel free to drop a note and you just might hear an episode about it soon. You can email the show at spenddonateinvest@gmail.com I’ll include that address in the show notes. There’s a very easy to scroll website for the show at spenddonateinvest.world check it out. Please share this episode with someone else you’d love to start the impact investing conversation with. Thanks to those of you who left reviews for the show! And the buymeacoffee link is still up. This is a website, it’s kind of like patreon, where you can chip in the cost of a coffee. In my case, it will go towards getting a microphone and paying for the website hosting and for an audio engineer to make sure the audio actually sounds good. So that’s it for today, let’s talk again soon.

https://unlesscollective.com/