A way to make a difference with your investments while generating financial returns.
Impact investing is the act of purposefully making investments that help achieve certain social and environmental benefits while generating financial returns. It’s a broad term that refers to everything from investing in companies with an explicit mission aligned with your values to avoiding investing in companies that do not meet those criteria. It can also be defined more expansively to include donating to nonprofits and projects that blend these charitable funds with investment capital to support larger or higher-risk projects that may not otherwise be financially viable.
This strategy is based on the idea that you can align your investments with your personal and philanthropic values while realizing financial returns. So, for example, if you were interested in reducing the use of fossil fuels, you might invest in funds focused on companies that develop innovative renewable energy solutions.
Growth in impact investing has been driven in large part by interest among the wealthy and among women. But a generational shift may help to popularize the approach even more. More than 40 percent of Millennials say they have engaged in impact investing, compared to only 20 percent of Baby Boomers.1 These trends, as well as increasing numbers of institutional investors incorporating impact into their approach, have been accompanied by a growth in options for individual donors and investors who want to participate in impact investing.
There are many different ways to invest for social or environmental impact or both. Here are a few common ones:
Impact investing offers a variety of benefits—some quantifiable and tangible, others less so but still important. Here’s a sample of the benefits of impact investing:
It’s also important to note that investing for impact doesn’t necessarily mean you have to compromise financial returns. Numerous studies have looked at the performance of impact investments and found that investing in sustainability has usually met, and sometimes exceeded, the performance of traditional investments.
Socially responsible investing (SRI) is often used synonymously with impact investing or sustainable investing. SRI typically refers to strategies for investing in mutual funds or corporate stocks and bonds based on one’s values. In general, a socially responsible investor tries to encourage corporate practices such as environmental stewardship, consumer protection, human rights and diversity.
As impact investing becomes more popular, the number of available SRI investment options has grown. Some emphasize aspects of a company’s behavior or management—often labeled as ESG (environmental, social and governance) factors. For example, gender-focused ESG funds select companies with significant female leadership while green funds might focus on companies that limit water consumption or carbon emissions.
Other social-impact funds focus on companies that generate revenue from products or services that address a specific social issue, like renewable energy or affordable housing.
Finally, some funds are notable simply for what they do not include. They may exclude “sin stocks” for example, such as shares of businesses that operate in industries like alcohol, firearms, tobacco, gambling or military weaponry.
The simplest way to get started with impact investing is by investing in one of the growing number of ESG funds or by donating to an impact investing nonprofit. More sophisticated strategies, such as making an investment in individual companies or lending to nonprofits, can be a complex enterprise and require more knowledge and expertise.
A donor-advised fund, like the Giving Account at Fidelity Charitable, is like a charitable investment account for dedicated use in supporting charities. When you make an irrevocable contribution to a donor-advised fund sponsoring organization, you are eligible for an immediate tax deduction, and then can recommend grants over time. The dedicated charitable funds can be invested for tax-free growth so there is potentially more money available for giving.
If you have a donor-advised fund, there may be multiple options to explore impact investing, though such options may vary depending on the sponsoring organization. On the investment side, you may be able to recommend that your account balance be invested for tax-free growth in an impact investing option. At Fidelity Charitable, for example, donors can recommend investments from a variety of options, including an ESG fund.
Additionally, a growing number of donors are also choosing to recommend grants to impact-investing nonprofits. According to the 2023 Fidelity Charitable Giving Report, donors recommended grants totaling more than $50 million in 2022.
More options may be available to donor-advised fund donors who wish to take an even more significant step into impact investing. For example, donors in Fidelity Charitable’s Private Donor Group can invest in impact-oriented private equity or venture capital funds, and make recoverable grants to nonprofits that can be repaid to your donor-advised fund once the project is complete so the funds can be used for additional grants.
1 2021 Future of Philanthropy, Fidelity Charitable
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