If you want to invest with an ethical edge but don’t know where to start, this review on impact investing will explain the options available to you. Due to the ever-increasing popularity of socially conscious investing, many reliable investment products have sprung up. These traditional funds and ETFs (Exchange Traded Funds) provide ways in which individuals can put their money to good use by adopting the principles of impact investing. There may be a financial return as part of the deal; however, the emphasis is on investors acting as a source of the capital needed to bring about positive societal and environmental change.
The selected funds are designed to highlight the diverse ethical investment opportunities available. Then the easy-to-follow guide will explain how to convert the desire to be part of the change into an investment via a trusted broker.
The iShares MSCI Global Impact ETF is managed by BlackRock, one of the biggest investment firms in the world. It offers the safety of being run by a huge operation and has relatively low fees associated with that firm's economies of scale. Lower admin costs mean better returns for investors and more of the investment capital trickling down to the end-user of the funding.
The ETF is over $500m in size and seeks to track the investment results of an index composed of positive impact companies. These underlying firms all derive a majority of their revenue from products and services that address at least one of the world's major social and environmental challenges. The fund cross-checks its impact credentials against the United Nations Sustainable Development Goal programme.
It avoids investing in firms involved in any of these sectors: alcohol, civilian firearms, controversial weapons, conventional weapons, nuclear weapons, predatory lending, and tobacco.
Ethically sound investments don't need to be loss-making, and the price rise from March 2020 to Jan 2021 represented a +87% return to investors.
The Rize Environmental Impact 100 ETF ticks the box in terms of ethical investing, but of interest to potential investors will be the firm's decision to pursue an innovative approach to targeting firms and markets. Given the scale of the world's ecological and social problems, a fund that is re-thinking how things are done does have the potential to finance a moon-shot style project which might be transformative. It also opens the door to volatile performance returns from this ETF which offers a higher risk-return profile than some other impact investment products.
The ETF aims to identify and invest in the 100 most innovative and impactful companies in the world. It will target those “developing and applying solutions that address the world's most pressing climatic and environmental challenges” (source: https://rizeetf.com/funds/environmental-impact-100/). The investment methodology is based on the European Union's Taxonomy for Sustainable Activities protocols which address:
Industrial sectors suitable for investment include clean water, electrically powered vehicles (EVs), renewables and hydrogen, energy efficiency, waste, and the circular economy and nature-based solutions. Investors tracking their returns can check to what extent the LIFE ETF generates them in line with the Foxberry SMS Environmental Impact 100 Index, which the fund takes as its target benchmark.
The top 10 holdings of the Rize Impact 100 ETF (as of early October 2021) were diversified across geographical regions and sectors. US-based EV maker Tesla accounted for 1.29% of the fund's holdings. Meanwhile, Korea-based EcoPro, which manufactures high-quality gases to make manufacturing processes greener, was the top holding, accounting for 2.07% of the fund.
The impact investing sector has recently taken off: before 2019, asset flows into sustainable funds had never risen above $2bn in a single quarter. That situation rapidly changed, and the data agency Morningstar reports that sustainable funds attracted an estimated $8bn in net flows in the first half of 2019. That number surpasses the $5.5bn for all of 2018.
That's good news for environmentally conscious investors; the sector they are interested in is finally receiving a lot more attention. In situations of such rapid growth, inefficiencies can creep in, and the Environmental Impact Acquisition Corp is a blank cheque company incorporated to implement the corporate restructuring of firms to make processes more efficient. The process of getting more bang for every buck is achieved through buyouts, mergers, capital stock exchanges, asset acquisitions and stock purchases, which combine one or more businesses.
The Environmental Impact Acquisition investment mandate allows it to pursue any target in any industry or geographic region, enabling it to buy firms that are not so green and combine them with those already committed to the impact investing cause. The ultimate focus of the $212 investment vehicle is on identifying businesses that offer products, services and technologies that, in addition to serving customers' needs, also generate positive effects for the environment.
Investors in impact investments are typically driven by two incentives, with the desire to change societal and ecological practices outweighing the need to make investment returns. With the increased interest in the sector, both factors align to make impacting investment a potential win-win.
Many impact investors give priority to the need to address societal imbalances. Cash deposited by investors can be used to help smaller, greener firms develop their operations to compete with larger and less ethical corporations. Impact investing is a way to tip the scales in favour of the little guy.
While some progress was being made in recent years, the COVID pandemic, with all of the problems it brought, can be seen as a catalyst for society changing to a new way of doing things. The argument goes that if there was ever a time to use investing to generate change, it is now. This could be a seminal moment in terms of locking in the progress made so far and reconfirming to big corporations that the mood among investors and consumers has shifted.
The second reason to consider impact investing is that a groundswell of investor support for funds and ETFs can generate a financial return. Spotting and backing an established trend is the first step towards successful investing. While returns might not be the absolute priority, profits can be reinvested in other impact investment products.
Past performance is not a guarantee of future returns, but it's hard to ignore that in the year to the 30th of September 2021, the total percentage return was 20.66%.
The cumulative return for any investor who got in at the launch of the fund is 115.88%. This return aligns with the benchmark used, pointing to the whole impact investment sector benefiting from increased interest.
Steady long-term returns in any sector do not remain secret for long. The influx of investment in the sector might not concern the most socially conscious investors; however, it will ultimately put impact investing funds in a better position to achieve long-term goals.
The ethical investing and impact investing sector is a relatively new one and is, therefore, a fluid space. Some of the parameters used to categorise the industry are still in the process of being developed. Even big corporations are giving more significance to CSR policies but greenwashing only masks deep-seated problems to some purists.
Therefore, spotting genuine ethical investing opportunities involves filtering out funds that sell themselves as being higher impact than they are. It also requires investors to devote some time to checking if the fund has remained true to its eco-credentials during the lifespan of their investment.
Funds and ETFs are well-established types of investment vehicles. Termed ‘pooled' vehicles, they allow investors to buy a unit of a fund and, by doing so, gain exposure to a small part of the diversified assets held in the fund. The units can be bought and sold, and while your money is tied up in the fund, it will be used to support impact investment style projects. When investors sell their holding in a fund, the cash returned to them reflects whether the value of the underlying assets rose or fell over the time the money was invested.
Funds come in different shapes and sizes and have different types of investment mandates. Some might allow investors to buy and sell units only once a month. ETFs are a relatively new product and offer greater flexibility in terms of transaction times.
While consciously minded investors have been bringing about change in the broader society, online brokers have also revolutionised the investment industry. Online brokers offer a user-friendly way to place trades and monitor positions. The onboarding process can be completed online using a desktop or hand-held device, and the whole process can take a matter of minutes to complete. If you want to practice first using a risk-free demo account, then that is an option.
In terms of risk management, there are some common-sense guidelines to follow. The most important thing is to avoid scams and scammers, and the below tips, which are shared by experienced traders, are an excellent place to start.
The primary aim is to ensure your funds are secure. If you pick a rogue broker, your investment won't be going towards the intended new projects. One way to filter good brokers from the bad is to look for those who are licensed by a Tier-1 regulatory authority, such as one of those listed below.
There are a range of ETF and fund style products that offer exposure to an assortment of different investment opportunities. Some adopt a more passionate approach to the principles of impact investing, but all funds have an investment mandate that outlines the fund's aim. If the fund and fund manager are regulated, it will be bound by those investment guidelines. In that case, it can't independently move away from greener investing once investors have deposited funds.
The Rize Environmental Impact 100 ETF, for example, comes with the below small print.
“Any change in the investment objective and any material change in investment policies will be subject to the prior consent of Shareholders evidenced either by a majority vote at a meeting of Shareholders of the relevant Fund or by the written consent of all of the Shareholders.”
Funds that disclose their significant holdings also offer investors the opportunity to dig down into the Corporate Social Responsibility (CSR) statements of the projects and firms which have received investment.
Investors can locate and scrutinise impact investment funds by conducting online searches. Broker sites are an excellent place to start as they often have news and analysis updates on the sector.
The former studies historical price data to look for clues as to which way price will head in the future. Tools such as trend indicators come into this category. A divergence in price away from a moving average might also flag up a chance to buy a dip and optimise trade entry point.
Fundamental analysis looks into the core basics of an investment proposal. As any investment returns can be used on future projects, checking the core business metrics is strongly recommended.
It is worth repeating that the most important filter to apply when choosing a broker is to ensure it is regulated by a highly regarded financial authority. The terms of the protection provided to investors will differ slightly from country to country. Generally, brokers must demonstrate that they hold enough cash to be viable and ensure that client funds are held in segregated accounts. There will also be regular independent audits to consider. These compliance protocols are time-consuming and expensive to operate, so any broker that goes through with them and is regulated is in it for the long haul.
This shortlist of trusted brokers is a good place to start your search. Then it's a case of finding the best fit platform for your style of trading. Things to consider are how active an investor you want to be and what risk return you will apply to strategies
A lot of the features of the platforms are generic so that brokers can look the same, but some behind the scenes magic can help you meet your investment objectives. Some brokers specialise in offering a wide range of markets to trade; this would be useful if you wanted to invest in more off-beat funds. Others get a competitive edge by offering their clients access to high-end research.
The decision about which broker you choose will ultimately be influenced by personal preference. Trying out a risk-free demo account is one way to test if a broker's functionality is a good fit for you, and it also allows you to get to grips with the mechanics of the investment process using virtual funds.
Whether you're upgrading from a demo account or setting up a live account from scratch, the steps you take to put on a trade are the same. Regulated brokers will require you to provide personal details that prove your identity. That will also ensure that the account is only accessible by you. Regulators and brokers also like onboarding clients to answer some questions relating to investment objectives. There aren't any right and wrong answers. It's more a case of the broker getting a better picture of individual clients and complying with Know Your Client rules.
Most brokers offer an impressive range of payment options. Some are faster than others, and some involve admin fees, so it's worth checking the T&Cs if you want to avoid unnecessary charges.
Another neat feature associated with regulated brokers is compliance with Anti-Money Laundering (AML) laws. These state that any cash paid into a brokerage account can only be returned to the original account. While the move is designed to clamp down on international crime and terrorism, it does provide an added layer of security. There's no way for the broker to wire funds to any account other than the one you used in the first place.
The process of putting on a trade is as simple as entering the amount you want to buy into the data field on the platform. There are other order types to consider which help traders manage risk. These include Stop Losses, Take Profits and Limit Orders. These additional orders allow you to input instructions into the system to trade automatically if price reaches a certain level. They can help you cut losses on bad positions and take profits on good ones
Such tools mean that clients don't have to watch the market 24/7. OweverHowever, buy-and-hold style investors often don't apply them in case they get flipped out of a position thanks to price momentarily trading at a certain level.
Once everything is in place, buying impact investing funds is as easy as clicking or tapping ‘buy'. At that point, some of the cash you deposited into your brokerage account will be converted into a position in a fund or ETF. As the market price of the fund fluctuates, so will the value of your holding. ETFs tend to be associated with instant pricing, so you can sell out at any time, while some mutual funds have monthly valuations, which allow for subscriptions and withdrawals also to be monthly.
Before putting the position to one side, it's worth double-checking the fund you bought is what you intended to purchase. Fat finger errors are an unavoidable hazard, and even experienced traders make a habit of checking trade details immediately after trade execution. Any errors are best rectified immediately before the market price moves too far.
The portfolio section of the site is where you'll be able to check the value of your fund position. It's also where you'll head when the time comes to sell. Just click on the position and follow the instructions to close the trade, and the equity holding will then be converted back to cash and any trading profits or losses crystalised.
There are a lot of things to factor in when you start your impact investing ‘journey'. The choice between investments matching personal objectives or generating financial returns comes down to personal preference. Wherever you are positioned on that spectrum, choosing a trusted and regulated broker is the first step towards meeting your aims. From then on, it's a case of developing and using your skills to allocate capital to the projects you will get the most personal reward from.
Whether you measure your returns in terms of capital gains or of making a difference, choosing the right broker is step-1 in that process.
Investing in impact investing funds and ETFs allows investors to achieve two very different aims simultaneously. The financial returns from the sector have improved in recent times, and it has become one of the go-to markets for speculators and investors. The potential for profits will influence some participants more than others, and any positive returns can be recycled into new investments.
For many, impact investing is, at its core, simply a question of doing the right thing. The fact that in many instances it's turning out to be quite profitable is welcome, of course, but is still a secondary nice-to-have feature.
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