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A Beginner's Guide To Socially Responsible Investing

Updated: Feb 3, 2022

*This article is not financial advice. Please do your own research before investing and remember your capital is at risk when investing*

We all want to do good and leave our mark on the world. One of the best ways to do this is with our money. The saying ‘Every £1 spent is a vote for how we want to live’ (basically translates to ‘you can choose what or who you want to support by choosing where to spend, save or invest your money') is so true.

Although it’s been around for ages, the last decade has seen socially responsible investing become more and more popular. The market for impact investing is currently valued at $715 billion and there have been so many success stories for impact investors to compliment this increase in interest. So, sit back grab a coffee (preferably one made with renewable energy and recyclable materials, as we are talking about being socially responsible after all), and have a read through our ‘beginners guide to socially responsible investing’.

Let’s start with some definitions. When you think of socially responsible investing- the words ‘environment, social and governance (ESG)’, ‘ethical investing’ or ‘impact investing’ may come to mind. To set the record straight, we’ll start by outlining the difference between Ethical Investing Vs Impact Investing.

Ethical investing

Ethical investing is when you apply a set of your personal values or beliefs to determine what you will or will not invest in. For example, if you are extremely passionate about human rights and slave labour, and decide to invest ethically, you will be less inclined to invest in fast fashion companies that pay women and children pennies to sew clothes in awful working conditions.

This is slightly different to impact investing.

Impact investing

Impact investing looks at the social and/or environmental impact that companies are creating. Impactful investing sees you pumping in money to companies that are trying to solve social and environmental challenges. Impact investing is based on the concrete evidence of what companies are doing to make a difference and make a financial return, rather than personal beliefs.

Impact investing is super popular in some sectors more than others. Think sustainable agriculture, renewable energy, conservation, micro-finance, housing, healthcare, and education. You may be thinking ‘I invest. What in particular makes an investment impactful?’

Well in 2019, the GIIN (Global Impact Investing Network) set out the Core Characteristics of Impact Investing. In this, they mention 4 crucial elements that are needed for an investment to be considered as impactful. These are:

  • Intentionality

As an investor, you must have good intentions and want to make a positive social or environmental impact through investing your money.

  • Return expectations

Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. There is a myth that investing with impact reduces the chances of making a return on your investment. However, this is wrong. According to the Global Impact Investing Network’s 2020 Annual Impact Investor Survey, 68% of people reported that their investments met their financial expectations; 20% said they outperformed them. So, making a difference in the world and getting a financial return. Win-Win. And if that doesn’t convince you that you can have it all, a write up of the financial returns of impact investments are available in the GIIN’s report, GIIN Perspectives: Evidence on the Financial Performance of Impact Investments. Remember: with return, there is also risk. As with all forms of investing, impact investing does pose some risk.

  • Range of return expectations and asset classes

With impact investments, there is a range of financial returns that can be generated, this can be anything from below market expectations to market-competitive and market-beating returns. Impact investments can also be made across a number of assets, such as cash, fixed income, venture capital, and private equity.

  • Impact measurement

Finally (and most importantly), there must be a measured outcome and commitment to report the social and environmental performance and progress of investments. This often starts with understanding the social and environmental objectives that are to be achieved as part of impact investing. Then setting performance metrics/targets related to these objectives. Throughout the investment period, monitoring, managing and reporting the performance of investments against these targets is crucial.

So, you want to make an impact but don’t know where to get started?

Like most things at Fempire Finance, we start small. Taking the steps to research more about impact investing then getting started at a pace that works for you, is often the best way to learn.

1 . Understand what impact you want to make.

What are issues do you care about? Now more than ever, there are so many companies out there doing good things. But, it’s important to be specific. Do you want to free the dolphins? Promote green energy in your area? Stop modern slavery taking place in the U.K.? Find the companies that are actively fighting for your cause and invest in the ones that are promoting sustainable business practices that align to you.

2. Learn more about impact investing. Check out these links for some of the best resources on impact investing.

  • GIIN Membership: Gain access to a leading network of like-minded investors and organisations interested in deepening their engagement with the impact investing market.

  • IRIS: Always wondered what is acceptable with impact investing? IRIS+ is the GIIN's catalog of generally-accepted performance metrics.

  • Research : The Research Center collates all the latest information about market activities and trends, performance, practice, and more.

  • Training Program: Looking to get more clued up on impact investing? The GIIN offers specialised impact investment training to investors.

3. Will you go at it alone or get help with impact investing?

Depending on your investment experience, risk levels and confidence, you can either choose your own investments yourself, or use a service that choose and manage your investments for you. Many of the investment platforms have portfolios that can help you on your journey of impact investing. Check them out here: robo-advisors with socially responsible portfolios

4. Choose what you will invest in.

There are so many options available for impact investing. Here are some of the options:

  • Mutual funds that score highly when looking at the environment, social and governance factors. When considering mutual funds, you’ll want to pay close attention to the companies within the fund - do you research and check if they are as ‘ethically clean’ as they say they are. It’s also important to check out the fund’s expense ratio, as this will determine how much of your investment will go to the running costs of the fund and thus, how much money you will make. Expense ratios are the annual fees a mutual fund takes. For example, if you invest £1000 in a mutual fund with a 1% annual expense ratio, you’ll pay £10 a year. Ensure the fund expense ratio still makes the investment worthwhile.

  • Individual stocks in a particular company. If you have a strong belief and passion for a company that you believe is doing good for the world and doing well financially, then support it. It’s a lot easier to check the social conscious of individual companies compared to mutual funds. Check a companies sustainability report to see how they measure their impact and what they’ve actually done. To invest in individual stocks, platforms like Freetrade and Trading212 are available.

Check out our comparison of the major investing platforms in our ebook ‘Get FETCH in a fortnight’ Wherever you choose to make your investment, make sure that it fits into the 4 criteria set out the Core Characteristics of Impact Investing.

5. Increase your impact

If you decide to purchase individual stocks, you may have the option to vote on the policies of the company and change business practices for the better, this is through something called ‘shareholder voting rights’. As a shareholder, you can use your voice through your 'proxy' ballot which usually takes place just before a company’s annual general meeting. Do you currently invest in individual company shares but haven’t had the opportunity to vote? Check if you are eligible by contacting the company’s investor relations department or through a financial advisor.

If you do not invest in individual stocks, you can make a huge difference by lobbying a.k.a doing as much as you can to let the company know that you want them to take social and environmental concerns seriously. How can you do this? Sign petitions, demand time with the senior leadership of companies, request their impact reports, encourage them to do more and even refuse to shop with them - your small actions can go a long way.

So, there you have it - a beginners guide to impact investing. We’ve covered what they are, why any investment can’t be called impactful and 5 steps to get started with impact investing. Like many investors, we are super optimistic about the development of impact investing - it’s going to be big and you never know, your investment may even save the world (and make you a return)

Fempire Finance

*This article is not financial advice. Please do your own research before investing and remember your capital is at risk when investing*

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