Social impact investing: Putting your money where your heart is

As the world changes, new risks and opportunities continually present themselves from an investment perspective. As a private wealth advisor, it's my job to help clients navigate the changing landscape and to position their portfolios to succeed on a risk-adjusted basis over time.

One of the areas where I look for potential growth opportunities is in the realm of social impact investing.

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What exactly is social impact investing? I view it as the practice of integrating environmental, social and governance (ESG) factors into investment decision-making. The aim is to enhance risk-adjusted returns, while at the same time generating a positive social and environmental impact.

Within the context of an overall financial plan suited to an individual's financial goals and risk tolerance, social impact investing can be a useful way to align a client's portfolio with causes he or she supports.

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The three ESG factors guide this process. Social impact investing takes into account how companies address environmental concerns; for example, do they use nuclear power or renewable energy? How do they deal with waste management?

Social considerations may include whether companies are equal opportunity employers and if they assign a high priority to employee health and safety. Governance comes into play around corporate transparency and business ethics.

"Social impact investing allows individuals to raise their voices and make financial decisions not only with their heads but also with their hearts."

Using social impact investing with my clients has given them the unique opportunity to make investment choices in support of progress on some very big world problems.

As a global society, we face many new obstacles that are begging for great innovation. Water scarcity is one of them. According to a United Nations study, more than 780 million people worldwide do not have access to clean water. By 2025, the UN estimates, more than 1,800 million people will be living in areas with "absolute water scarcity," and people in two-thirds of the globe could be under "stress conditions."

These trends are significant and alarming. It will take innovation and substantial financial investment to circumvent disaster.

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For many of my clients, water scarcity and similar issues resonate as something we have a moral obligation to address. They want to join the effort to find solutions to these problems, but they don't always realize what options are available to them.

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Through the prism of social impact investing, I help them identify opportunities to support the causes they care about, while investing in areas that have the capacity to grow and thrive well into the future.

The idea of seeking out and investing in companies that are poised for a long-term competitive advantage is not new. What is more recent, however, is the idea that specifically evaluating ESG risks and opportunities is crucial to the financial analysis process.

Within the broader financial community, there appears to be some momentum in this direction. Recently, former New York Mayor Michael Bloomberg and former Securities and Exchange Commission Chair Mary Schapiro were appointed chair and vice chair of the Sustainability Accounting Standards Board, where they will work to bring more visibility to sustainability standards and supporting a more informed decision-making process on behalf of investors.

There is a wealth of information about ESG risks and opportunities available online. A financial advisor knowledgeable in the area of social impact investing can help you understand how your investment portfolio is positioned with respect to ESG factors.

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Social impact investing allows individuals to raise their voices and make financial decisions not only with their heads but also with their hearts. The conversation is worth having. Ask your advisor about social impact investing and how it might fit into your portfolio.