Editor’s Note: This article is a part of a series on investing advice for recent college graduates, drawing on expertise from financial professionals, university faculty and of course, InvestorPlace’s very own analysts and writers. Today’s article on impact investing and greenwashing comes courtesy of Craig Jonas, Ph.D., the CEO and founder of ESG holding company CoPeace. Read more “Money Moves for Recent Grads” here and check out Top Grad Stocks 2021 for our best stocks to buy for new graduates.
Younger generations — looking at you Gen Z, but Millennials too — are fed up with the mess their predecessors have left them. They see a climate emergency crying out for immediate, substantial action. And they know that today’s social and economic injustices could rip the nation apart if not effectively addressed.
The silver lining is that young Americans coming out of college and into the investing world are more than willing to face these challenges head on and do something about them.
Millennials and Zoomers have been the driving force behind “Conscious Consumption.” Conscious consumers make efforts to shop organic, and buy clothes, cars and other products and services from companies they see as socially and environmentally responsible.
Many of these “conscious consumers” are also becoming “conscious investors.” They invest based on their personal values, practically the antithesis of profit-at-all-costs investors. In fact, when considering potential investments, they consider People, Planet and Profit (aka the Triple Bottom Line). Conscious investors push companies to take a stand on social issues and invest in businesses directly working to solve social and environmental problems.
The influx of new, younger impact investors is terrific. However, it’s important to remember that impact investing is practically brand new. It’s still a little Wild West out there, and all investors — young and old — need to keep a few things in mind if they want to become true impact investors.
Greenwashing Isn’t Impact Investing…
Not every company out there is thrilled about the rise of impact investing, and I don’t just mean those that make money off of oil, guns or junk food. I’m talking about companies that only care about environmental, social and governance issues when it benefits the bottom line.
Greenwashing is when companies use PR and advertising tactics to convince investors and other stakeholders they are more environmentally friendly and socially conscious than they really are. These companies may have an internal initiative or two that make their operations seem “less bad,” but they do little in terms of “active good” when it comes to minimizing their environmental impact.
Many so-called “sustainable” mutual funds and ETFs are nothing more than a collection of companies using greenwashing techniques. If you look closely at their portfolios, you’re likely to find oil and gas companies, gun manufacturers, junk food companies and companies with a history of gender inequality.
… And Impact Investing Doesn’t Mean Reduced Returns
A fairly common misunderstanding is that impact investors are financial martyrs, forgoing competitive returns in favor of sustainability. But that simply isn’t the case. According to the 2020 GIIN Annual Impact Investor Survey, 99% of respondents reported meeting or exceeding their impact expectations and 88% reported meeting or exceeding their financial expectations.
In addition, a Royal Bank of Canada review of more than 40 major studies found no evidence that socially responsible investing resulted in lower investment returns.
Emphasize Social and Environmental Problems You Care About…
Maybe climate change is your focus. Maybe it’s access to health care. Or companies that eliminate hazardous waste. Whatever your personal values and intentions, look for investment vehicles that will directly impact those areas. It’s easier to do your due diligence when it concerns issues you care about and builds on the knowledge you already have.
… And Consider a Variety of Impact Investment Vehicles
As an impact investor, you can invest directly in companies aiming to address a particular social or environmental issue. But you could also invest in mutual funds or ETFs that are comprised of true impact companies and actively screen out greenwashing imposters.
In addition, there are a few alternative investment vehicles available, such as our holding company structure here at CoPeace, which allows investors of all means to invest directly in small, growing, for-profit impact companies that are effectively addressing social and environmental problems in the world.
Whatever approach you choose, make sure it offers transparency when it comes to its social/environmental impact as well as financial performance.
Put Your Money Where Your Morals Are With Impact Investing
When it comes to societal level problems, it’s easy to feel as if your efforts as an individual are meaningless in the face of wider social trends.
But impact investing has the potential for exponential growth in the coming decade.
According to a study by Coldwell Banker Global Luxury, by 2030 Millennials will hold five times as much wealth as they have today. Furthermore, they are expected to inherit over $68 trillion from Baby Boomers over the next 30 years in what’s been called “The Great Wealth Transfer.” Anyone doubting that young investors have the potential to change the world for the better are mistaken.
By becoming an impact investor, you’ll help steer the stock market from profiting-at-any-cost to a “New Capitalism” mindset, in which an equal emphasis is placed on social, environmental and financial performance.
The future of finance is focused on people, not profits. And that future isn’t just fast approaching, it’s already here. All that’s left for new graduates to do is buy companies they believe in and watch as their conscious investments rake in the cash.