Home Investment A Beginner’s Guide for Small Individual Investors

A Beginner’s Guide for Small Individual Investors

by Janessa Lee

Investing with a positive social and environmental impact has become increasingly important to individuals and organizations. In response, asset managers have created ESG (environment, social, and governance) funds that target socially-minded investors. However, when conducting research on these types of investments, it became evident that there are limited options that actually deliver positive social or environmental impact. As a result, it’s important to consider other avenues for impactful investments.

When considering responsible investing, it’s crucial to determine your goals. Do you want to feel better about where your money is invested, or do you want to make a tangible difference? Additionally, are you willing to concede some income to obtain impact, or do you want the same returns as other investments?

For those who want to feel better about their investments, negative screening is a popular option. This involves excluding companies that engage in harmful practices from your investment portfolio. While this may help you feel more at ease, it doesn’t necessarily deliver a positive impact, as secondary market investments don’t provide companies with new capital.

On the other hand, if you want to deliver impact and allocate your capital to companies that improve social and environmental welfare, you may consider private investment opportunities. These options are often only available to accredited investors with substantial means, as they involve providing capital directly to startups or growing companies working towards positive change. Unfortunately, these investment opportunities may not be accessible to individuals with limited funds.

Considering returns is also crucial. Lowering return expectations allows room to fund environmental or social welfare initiatives, but it’s important to determine how much return you’re willing to give up. If you’re not willing to concede any returns, your options for impactful investments may be limited, as you would essentially be asking for market returns plus social or environmental benefit, which is traditionally thought to be near impossible.

Public equities ESG funds are often marketed to socially-minded investors, but they don’t deliver impact in a meaningful way. These funds are built of securities of companies deemed resilient to environmental, social, and governance changes, rather than companies actively working towards advancing planetary welfare. Additionally, ESG funds are secondary market vehicles that don’t provide primary capital to companies.

Engagement funds, on the other hand, offer a potential avenue for impact. These funds are led by managers who actively advocate for positive change by engaging with management teams and advocating for transparency, diversity, and less environmental damage. Research has shown that such engagements can lead to decreases in targeted companies’ carbon intensity. However, these types of funds are limited and may not be accessible to all investors.

In conclusion, finding impactful investments that also deliver market returns can be challenging. While options like negative screening and public equities ESG funds may offer some level of satisfaction, they often lack significant impact. Private investment opportunities and engagement funds can provide more direct impact, but they may not be accessible to all investors. Ultimately, it’s important to carefully consider your goals, risk preferences, and return expectations when deciding how to invest your savings for a positive social and environmental impact.

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