Could the companies you invest in actually help in the fight against climate change or create a more equitable world?
That's the question at the heart of impact investing, or investments made with the intention of creating a positive social or environmental affect in addition to a financial return. And the strategy is more popular than ever, according to a recent report from the Morgan Stanley Institute for Sustainable Investing.
Some 85% of individual investors, and 95% of millennials, are interested in sustainable options, per the report, which surveyed 1,000 active investors across the U.S.
Despite that "all-time high" enthusiasm, just over half of respondents are actually engaged in "at least one sustainable investing activity," such as screening investments for potentially objectionable companies or divesting completely because of a company that does not align with the investor's values.
Previous reports have shown similar increases in interest and participation in impact investing, also known as socially-responsible investing.
This is driven by individuals increasingly believing that what they do with their money and retirement savings can have an influence on major issues like climate change, according to Morgan Stanley's report.
What is impact investing?
In the 1960s, politically conscious individuals began using their investments to "draw attention to social and environmental issues," and eventually the first Socially-Responsible Investment (SRI) funds were developed, according to a report from the Global Steering Group for Impact Investment.
Now, there are a variety of funds based on any number of social and political issues. An investor might want to avoid gun manufacturer stocks, for example, while intentionally investing in companies that promote gender equality. Corporate governance — for example, if a company has ethical work practices or a diverse board of directors — is also an important aspect of impact investing.
Climate change is the top reason given for interest in sustainable investing, according to Morgan Stanley's report. Investors want to buy into companies they believe are good environmental stewards, or at least not actively harmful.
How to get started with impact investing?
If you're looking for SRI or ESG (environmental, social and corporate governance) funds you can invest in them through all of the major brokerages, like Fidelity, Vanguard, Charles Schwab, etc. Wherever you are investing, your broker should be able to provide information on each fund and what type of companies it invests in.
If you're going to research on your own, Morningstar and some other companies offer "sustainability" ratings for funds and indexes, which you can read more about here. As You Sow is a nonprofit of shareholder advocates that identifies publicly-traded companies that are doing good environmental work.
One criticism of impact investing is that it's potentially limiting: Most financial experts recommend investing in a diverse array of companies, and divesting from "problematic" companies could harm an individual's returns. But Morningstar, an investment research firm, reports that there were over 350 ESG funds available at the end of 2018, and that these funds can offer enough diversity to replace more conventional investments. And sustainable funds actually outperformed benchmarks in 2018, CNBC previously reported.
How to make sure your 401(k) is invested in socially conscious funds?
For those who are solely investing through a 401(k), it can be more complicated to make sure that your investments are sustainable. Morgan Stanley's report notes that 88% of people with the workplace retirement account are interested in impact investing, but less than half are offered sustainable options via their plans. Investment News reports that just 4% of 401(k) plans offer ESG funds at all.
To find out if your workplace plan offers SRI funds, call your provider and ask. If they don't, which is likely, you might consider investing in your 401(k) up to the employer match, and then opening a traditional or Roth IRA at a brokerage that offers sustainable options. Vanguard, for example, offers the Global ESG Select Stock Fund (VEIGX), which is a U.S. and international stock fund, and the domestic ESG U.S. Stock ETF (ESGV), among a few others.
Newer fintech platforms like Betterment and Ellevest offer portfolios specifically tailored for impact investing.
Always check the fees on any investment you buy, particularly on actively-managed funds, which tend to have higher expense ratios than passively-managed index funds. Know that any type of investing contains risks — future gains are not guaranteed.
As CNBC Make It wrote previously, there is an existential debate over whether any company can actually be considered "good" or moral, and whether investments are the best place for consumers to make the biggest difference. Those are choices you will have to decide for yourself.
Don't miss: Here's how investments can make money and help the environment
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