7 Steps To Become An Impact Investor

Published on:
by KnowESG

The desire for impact investing and for companies to facilitate ESG values is growing. It’s fair to say that for many in the investing circle, impact investing, socially responsible investing, and ESG investing are the signposts to the future of investing in general. Even though there are plenty of hurdles to overcome, understanding how to become an impact investor shouldn’t be one of them. 

Consider the following steps below to help you become an impact investor:

What Makes An Impact Investor

Before delving into the steps, it helps to know what an impact investor is. To start, impact investing is defined as a strategic initiative focused on private investment. In other words, impact investing relies more on someone’s personal feelings about what company to invest in.

This definition is further expanded now that ESG has entered the scene. Through ESG, investors now have quantifiable data on which to base their feelings on particular issues and investments.

With this in mind, an impact investor is defined as someone who measures a company's performance but also considers what that company is doing on other social issues, such as their attitudes towards and action on climate change, how they treat employees, and what they do for the community they serve.

Another way you can look at ESG and impact investing is that you’re investing with the intention of generating a positive and measurable impact on the world, on top of a financial return.

Article: What’s The Difference Between SRI, ESG, And Impact Investing?

Steps To Becoming An Impact Investor

1. Use the “Three I’s”

otherwise known as intentionality, influence, and inclusion. These form the foundation for how you want your portfolio to look. This strategy is exactly what Morgan Stanley, which manages $70 billion in ESG worldwide, uses. These three I’s are further defined as:

  • Intentionality represents companies that have a track record of sustainability while deviating from investments you consider objectionable.

  • Influence represents how much you can influence a company. Morgan Stanley, for example, encourages investing in companies where you can be an active shareholder and can advocate for change, when and where it is needed.

  • Inclusion is represented by how diverse the company is. On top of having a diverse portfolio in various industries, you want companies that hire women and people of colour in positions all across their structure, for example.

2. Separate Those Who Do And Those Who Talk

One of the core components of impact investing is research. Investing requires some level of financial savvy to understand the various income statements, of course. However, you also need to have a general understanding of the industry and how this company operates.

Signal tools can be helpful to measure sector performances, but digging into companies deeper can be helpful too (such as in our growing database). These tools help with determining whether companies are pulling publicity stunts or making actual changes.

3. Match Investments With Your Personal Values

With all that information, the next step is to decide what to invest in. There is no wrong decision in this regard, as every investor will have their own unique standards as well as industry focal points. As a result, you shouldn’t feel obligated to invest in every single company you invest in. Even if it’s good, you want to invest in a company that makes you feel good.

With that in mind, a good guide to what to invest in can be found by looking at your charitable contributions over the years and investing in companies that are doing similar work. If you donated to indigenous people, for example, you might want to invest in companies that prioritise hiring a diverse workforce. 

Or more broadly, if you donated to climate change initiatives, you might want to put money into companies that upcycle, reduce plastic usage, build solar panels, or provide electric vehicles (or bikes) to their workforce.

Featured Article: The Top 3 Visible Benefits Of ESG Investing

4. Be Conservative With Your Investment

You don't want to put all of your money into a company at once, as you would with any other investment. You want to ease into it. Begin with a cap on your initial investment of 5% to 10% of your total investable assets. You might even want to go less than that.

Starting off small and going larger over time can help you learn more about the investment market, and familiarise yourself with stocks, bonds, and even funds that align with your values.

5. Screening Funds

Once you become familiar with impact investing and have invested a bit, getting the help of a financial advisor is ideal. Speaking with one can allow you to begin vetting ESG funds, into which you can delve into more details.

This is better than doing this on your own, as you can filter through companies that invest in oil and gas, tobacco, and firearms faster and more efficiently.

Some good places to consider additional guidance are Morningstar and Lipper, which accommodate fund ranking as well as deep ESG fund research.

6. Turn To Banks And Credit Unions

Impact investors may have more options than they realise when they consider banks and credit unions. Many of these financial institutions have their own financial vehicles, and some are tailored to cover ESG values.

7. Have A Checklist And Stick To It

Finally, all investors should have a plan in mind and not deviate from that plan. Impact investing is more nuanced since you’re including your own feelings with your investing goals and strategies. Some items to consider on that list are:

  • Have you researched and articulated your impact investing goals?

  • Have you decided to jump into ESG investing on your own or hire an expert? If it’s the latter, are the responsibilities and duties defined?

  • Do you have a timeline for meeting your goals?

  • Is there a stakeholder engagement blueprint made?

  • Do you have alternative options in changing plans - or ESG advisors - if it comes down to it?

Having good answers to the following questions will further reinforce and solidify you as an effective impact investor for the long term. And ideally, your decision to find out what works for you, and what makes impact happen, should actually make the world a better place.

Looking to find further educational options around ESG to formulate your impact investing decisions? Follow our ESG Courses.


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