Impact Investing: How You Can Make a Difference With Your Investments

Alevin Chan

Alevin Chan

Last updated 25 April, 2023

Impact investing is beginning to pick up steam with several well-known ETFs now available for retail investors. Here’s how you can more easily invest to make a difference in ways that matter to you.

With global temperatures set to once again break new records this year, it can feel like no one cares about the state of the world.

But judging by recent trends in the environmental, social and governance (ESG) sector – of which climate change is just a part – investors aren’t content to take things lying down.

Let’s take a look at some figures. According to PwC, in 2021, global ESG assets under management (AUM) was estimated to be US$18.4 trillion.

This figure is expected to grow to US$33.9 trillion by 2026, making up 21.5% of total AUM – globally.

Other estimates point to an even larger figure. Bloomberg expects ESG assets to reach US$53 trillion by 2025, more than a third of global AUM.

These are some pretty inspiring numbers, even more so when you consider that the charge is being led by institutional investors – traditionally the movers and shakers of investment markets.

ESG investing is no longer niche, and through impact investing, investors are successfully challenging the traditional notion that you can either invest for profit or to do good, but not both at the same time.

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Impact investing, ESG and socially responsible investing – what’s the difference?

Impact investing

Impact investing may be understood as the deliberate effort to make a positive impact in the world by choosing to invest in companies, products or services that produce a tangible social good.

Unlike philanthropy, which has no expectation of financial returns, impact investing takes financial returns into account, although the emphasis may be secondary in some cases.

ESG investing

ESG investing may be considered as one of two approaches to impact investing.

In ESG investing, the idea is to invest in companies that have a lesser negative impact, as indicated by their ESG scores. This doesn't necessarily mean that your investments are, say, completely carbon-neutral, although the companies in your portfolio may be the least polluting among their peers.  

However, due to the lack of standardisation in how ESG ratings are calculated, and what they actually mean, ESG investing is considered by some to be problematic.

Related to this topic: 5 Best Sustainable Investments In Singapore


Socially responsible investing (SRI)

SRI follows largely the same lines as ESG investing, but goes one step further to exclude or include companies on specific ethical considerations.

For instance, an investor that opposes war may exclude an ETF that owns stocks in weapons manufacturers. Meanwhile, someone that believes in gender equality may want to actively invest in entities that work to advance the cause.

Some candidates SRI practitioners may avoid include:

  • Alcohol manufacturers

  • Gambling providers

  • Firearms and weapons manufacturers

  • Tobacco producers

  • Marijuana distributors

  • Entities with a record of human rights and labour violations, and environmental damage

As you can see, the lines are quite blurry between impact investing, ESG investing and SRI. Retail investors further face transparency issues, as ESG ratings may not always paint a complete picture.

Rooting out specific companies on moral or ethical grounds may require a fair amount of in-depth research (and probably running into more conspiracy theories than is safe for your mental health).

Thankfully, it is getting easier for retail investors seeking to do good while making a healthy return. While impact investing started off as a niche among the rich elite, increasing demand from the wider market has fostered greater variety in impact investing products.

Related to this topic: How To Balance ESG Investing in Your Investment Portfolio

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How retail investors can participate in impact investing

Impact-focused ETFs

Exchange-traded funds (ETFs) are a popular investment product that track the performance of a basket of underlying assets. Thus, you can find ETFs of every imaginable variety, including several that cater to the aspirations of impact investors.

As impact investing can mean different things to different people, based on your personal beliefs, concerns and preferences, it is helpful to first define what’s important to you, and what causes you wish to support.

Thereafter, browse lists of impact-focused ETFs reviews and recommendations to see which ones you should add to your portfolio. To help you get started, we’ve picked out 10 popular impact investing ETFs.

Fund name

Category

Expense ratio (%)

Fidelity Water Sustainability

Natural resources

0.95

ALPS Clean Energy ETF

Renewable energy

0.55

SPDR Kensho Clean Power ETF

Renewable energy

0.45

SPDR SSGA Gender Diversity ETF

Corporate gender diversity

0.20

Humankind US Stock ETF

Companies with greatest potential to do good

0.11

VanEck Environmental Services ETF

Waste management, recycling, environmental consultancy

0.55

Etho Climate Leadership US ETF

Companies with least carbon emissions in their industries

0.47

CCM Core Impact Equity Fund

Companies with proven or best-in-class sustainable practices

1.97

Impact Shares NAACP Minority Empowerment ETF

Companies with strong racial and ethnic diversity policies

0.49

Goldman Sachs JUST US Large Cap Equity ETF

Companies with just business behaviour and fair practices and policies

0.20

Source

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Peer-to-peer lending

If you are looking for a more direct way to make the impact of your investments felt, peer-to-peer lending may be of interest to you.

Peer-to-peer lending has actually been around for quite a while now. The idea is for investors to lend small sums of money that are pooled together as business loans and offered to those who need them.

For example, you could invest in a small business loan, putting in S$2,000 to help an entrepreneur start up their business. When the loan is repaid, you will get back your principal, with interest.

There are two things you should note. One, like with any investment, peer-to-peer lending involves risk, up and and including losing your entire capital.

Two, peer-to-peer lending does not guarantee that the businesses you lend to will follow your (or any) ESG or sustainability preferences.

In that sense, peer-to-peer lending may not fully meet your criteria of “doing good for the planet” with your investment.

Read these next:

Best Ways to Grow Your Wealth Through Priority Banking

What are Family Office Services, and What Type of Investors are They Suited For?

Going Green: What Types Of Ethical Investments Can You Partake In?

Take This Before You Go: A Must-Read Guide For Budding Investors

Best Investment Sign-up Promotions In Singapore (2023)

An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.

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