In my previous post, I discussed where you live and how much money you already have can determine what impact investing options are available to you. In this blog post, I will go over a few practical, preliminary steps for achieving impact.
Seek the Guidance of a Professional Advisor
First, whether you are an experienced investor or not, you should always seek the advice of a professional financial planner before making any investment decisions. This is true regardless of how much money you have or how much you wish to allocate toward impact. A good advisor will assess your risk tolerance, evaluate your financial goals, estimate your current income needs, and help you develop and implement a holistic investment strategy that takes into consideration your age, net worth, local regulations, and personal tax situation.
In my opinion, the best financial advisors are certified. Certification varies by country, but typically it means they have passed rigorous education and work experience requirements set by an independent professional body and they must adhere to a code of ethics and professional standards that ensures, among other things, that they always act in your best interest. It typically also means they have continuing professional education requirements, which oblige them to stay abreast of current trends and maintain their professional skills. Internationally, one of the most well-known is the Certified Financial Planner (CFP) designation, but there are others including the Chartered Financial Planner designation in the U.K. and the European Financial Planner certification of the European Financial Planning Association.
Your advisor should be someone you trust and have confidence in based on their experience, credentials and ability to answer your questions in plain English. Certification does not automatically mean they know what impact investing is, so be sure to ask questions before engaging an advisor. If they do not know what impact investing is, or when you ask their eyes glaze over or they become dismissive or discouraging, then you may want to consider a new advisor. Also, as with any advisory arrangement, be sure to understand how your advisor charges for their services, and whether they have any conflicts of interest.
Understand the Investment
Second, as with any investment opportunity, you should know what you are buying (the caveat emptor or “buyer beware” principle applies). If you don’t fully understand the investment opportunity in terms of potential risks and returns, you probably should avoid investing. If an investment prospectus exists, read it carefully. Ask your financial advisor if something is unclear. If there is no prospectus, then read whatever disclosures are available on line or in writing. Be sure to understand what the social or environmental benefits are, and make sure they correspond with the impact you want to achieve. Find out if the investment provides regular reports on the impact it is achieving in addition to the financial results. In sum, do your homework and spend the time to understand all aspects of the investment opportunity. For reasons mentioned in my previous blog post, some retail impact investments may be exempt from regulatory disclosures and information filings, so extra caution is advised.
Understand Your Purpose
Third, ask yourself why you want to invest your money for impact in the first place. Are you mostly interested in the social returns on your investment, or are financial returns equally important? Are you thinking to allocate part of your annual charitable giving toward impact investing? Do you want to allocate your entire portfolio toward impact or just a portion? All of these questions are important to discuss with your financial advisor so that you can formulate a strategy that is in line with your goals.
Finally, if you have a bank account for everyday use (depositing salary, saving idle cash, managing debit and credit cards, paying bills, etc.), you may want to think twice about who you bank with and how your money is used. If you are like me, then you probably do almost all of your banking on-line. If you don’t require specialized banking services, aren’t using your bank to manage your investments, and if proximity to a branch is not a key concern, then it might be relatively easy to switch to a bank that is ethically and socially responsible. The Global Alliance for Banking on Values is a network of independent banks around the world whose goal is to “change the banking system so that it is more transparent [and] supports economic, social and environmental sustainability.” Be sure to research what products and services are offered, but if you can get the same suite of services from a bank that is dedicated to sustainable economic, social and environmental development, then why not make the switch? This is a relatively easy first step anyone can take without necessarily seeking professional advice.
While these basic steps may seem like common sense, they are fundamental investment principles that apply to everyone.
My next post in this series will begin to review some options for retail impact investing.