For a lot of young people, particularly those who grew up against a backdrop of the 2008 global financial crisis, investment is scary.
Investment is people in suits with a lot of money to burn, and a whole world away from people like us.
But there’s a type of investment that’s growing in popularity and, with its connection to the fight against extreme poverty, is tailor-made for Global Citizens — so we thought we’d introduce you to the world of what’s known as "impact investing," and help get you started.
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Essentially, impact investing is putting your money where your ethics are: It’s, to quote Rebecca Jones, editor of Good With Money, “making a positive difference in the world with your money.”
It means investing your money in organisations that are having a direct and measurable positive impact in the world — with “the measurable part being absolutely key,” according to Jones.
But this isn’t your typical act of donating to charity; it’s investing your money in organisations that are working to create a better world — so it also means you can grow your money in the process.
“As good as it is, impact investing isn’t charity,” Jones told Global Citizen. “This is sound financial planning. Since 2014, numerous studies have shown that investing for good can potentially make investors more money than investing in companies that either actively or passively hurt people and the planet."
OK. Tell me more.
There’s a bit of a sliding scale when it comes to positively investing your money, and impact investment is really an evolution of ethical investment.
But the difference is that, while ethical investment screens out “bad” companies and activities, impact investment only screens in “good” companies.
Impact investment takes the UN’s Global Goals as its inspiration, and it’s not enough to simply not be doing “bad” things. These organisations have to be doing “very good” things in clearly quantifiable ways — so it’s investing in things like housing initiatives, solar panels, empowering women and girls, and ensuring health care access, to name a few.
And this type of investment is actually all about reclaiming power and bringing it back to the people.
“The world over, savers and investors are waking up to the power they have in a system that relies on their capital to thrive,” says Jones.
“Those seizing that power are reversing that flow, putting money into the hands of people and projects that have a positive impact on society, the environment, and our collective future,” she adds. “It is a truly exciting time.”
Aren’t I too young to be thinking about this?
While it may feel like we’re a long way away from cashing in our pensions, we’re never too young to be thinking about saving and growing our money for the future.
When we asked Jones whether this is a good type of investment for young people, she said: “Yes, absolutely, 100%.”
“I think that we’re all really willing to spend four months researching our next mobile phone, but we’re not willing to spend the same amount of time researching how we can grow our money, provide for our future, and make the world a better place,” she added.
“I see this with my friends so much — they’re so bright, and they’re so intelligent in so many ways,” she continued. “But they hear one financial word and they’re like, nope!”
And if like most young people right now you’re increasingly concerned about how your actions are impacting the world — through things like plastic pollution, palm oil production, meat-eating, etc. — then impact investment is definitely something you should be aware of.
“It’s no good going to Sainsbury’s and poring over every single food label to make sure there’s no palm oil in it,” says Jones, “when in your pension fund you’re investing in Nestlé.”
What about the fact that I don’t exactly have lots of spare money?
There are actually lots of options for investments that only need a small amount of money — some as low as £5 — to get started. Read on to find out more.
Investing is completely new to me. What do I need to know?
Remember, this is the first step on the road — but impact investment is likely going to take a bit of legwork from you. But, according to Jones, it is worth it and we all just have to roll up our sleeves.
But here are a few of the basic terms you’re going to need to get started.
In investment, you have two main assets: equities and bonds.
Equities are the same as shares, and when you buy them you’re buying into a company. So if you go and buy a share in Tesco, for example, you essentially become a part owner of Tesco.
But Tesco also issues bonds, and that’s debt. So Tesco is borrowing money from you and other investors, and as a result, Tesco pays you an interest rate on the money it’s borrowed from you. It’s the same as how you might borrow money from your bank, and promise to pay the bank interest on top of the money you borrowed from them.
You should also know the terms listed and unlisted. Listed means that a company is listed on a stock exchange — for example, the London Stock Exchange or any other global exchange if it isn’t a UK company. And unlisted means it isn’t.
There are different kinds of companies that you can invest in with impact investment — some are listed, but most aren’t.
Previously, you wouldn’t have been able to rush out and invest in an unlisted company, but that has become a lot more accessible in recent years.
The bonds of listed companies, according to Jones, are safer than equities because if a company goes bankrupt, it has to pay back people with bonds first. However, if the company is unlisted, bonds are no safer than equities. Indeed, anything early stage and unlisted is considered “high risk” by the UK financial regulator, the Financial Conduct Authority (FCA).
Bonds are generally for shorter-term investment, while equities are better for longer-term investment.
How do these terms apply to me and my impact investing?
As we mentioned above, most direct impact investments are unlisted — which is largely because the companies and projects involved are very small.
So when you start looking for companies to invest in, you might find a solar energy company on an investment platform that you really want to put your money into, and you can do that.
But there are pros and cons of investing in unlisted companies. Because it’s unlisted, it typically carries more risk. But because it’s often a smaller company, there’s the advantage that your money may have a bigger personal impact.
According to Jones, it’s generally these smaller, more impactful investments that younger people really love, “because they are so understandable.”
However, these investments are not without risk. With unlisted companies, they could go bust at any point and because of the low amount of protection your money would then be lost. That’s not to say don’t invest in them, of course, just maybe not every penny you own.
When a company is listed, that company has had to jump through a lot of hoops, so it’s more regulated and your money is, in theory, safer.
Got it. What’s next?
OK, one more useful term and then we’ll move on: investment funds.
These are funds that gather together the money of loads of different investors, and invest in multiple different companies.
“That’s the key,” says Jones. ““Most of the bigger sustainable and impact investment funds are millions of pounds large and invest in lots of companies at once. This helps you to spread your risk significantly.”
Some of these funds invest in listed companies, some in unlisted companies, and some in both.
For example, Jones says she has put all of her pension in a sustainable investment fund, which is “maybe £500 million large, and invests in 50 listed companies in the UK that are deemed to be sustainable according to the investment manager’s process, which follows the UN Sustainable Development Goals.”
Can it really make me money though?
Increasingly, data is showing that investing for good can actually make you more money than traditional investing, according to data cited in a new guide to impact investing from Good With Money.
“Fundamentally, this is because companies that are doing good things for society and the environment simply do better over the longer term,” reads the report, which was co-authored by Jones.
“For these firms, there are no emissions rigging scandals or negligent oil spills waiting in the wings,” it continues, “only solid growth rooted in sustainable foundations.
“And so it seems that investing to make a positive impact on the world is, in fact, a virtuous circle,” it adds. “Some call it karma, others ‘what goes around comes around.’ We just call it good financial sense.”
What’s more, according to Jones, cash interest rates have been “dog shit” for the last 10 years because of the £375 billion the Bank of England printed to keep the UK economy afloat after the 2008 financial crisis, so “saving in cash is a mug’s game, because inflation is higher than the average cash interest rate, which means you’re losing money.”
She adds: “This means you have to invest if you want to grow your savings over time, and if you have to invest then you should do it in a way that is in line with your principles.”
Is it safe?
As with any investment, impact investment comes with inherent risks — which we’ve already touched on a bit above. It’s never going to be 100% certain you won’t lose your money, through the company going bust, for example.
But there are things you can do to mitigate the risks.
“Diversification is key,” according to Jones. “Variety is the spice of life, and diversifying where you’re putting your money can also help you spread the risk and potentially boost the money you’re getting back.”
And according to the Good With Money guide: “Taking this approach means you don’t have to choose between either impact funds or projects and companies — you can have exposure to all of these impact approaches in any number of different forms.”
It also emphasises that you don’t need to be putting huge amounts into each fund or individual company.
“One month you might put £50 into a fund, for example, the next £50 into a community energy bond or share offer, and the next perhaps another fund, and so on,” the report says.
OK, how do I get started?
While Jones is obviously a bit biased as she’s the editor, she does point out that Good With Money is “actually the only consumer blog for sustainable finance in the UK.”
So, in all seriousness, Good With Money is a great place to start getting your head around the whole thing.
But, beyond that, you are going to have to put in some Googling legwork. That is, until the industry gets to creating a “money supermarket” for impact investing to make it all more simple and accessible.
“So the industry is recognising that and it’s moving in that direction, but you just need to pump some search terms into Google and see where you get,” says Jones. “Ethex is a fantastic resource, if you’re interested in that real grassroots impact investing, but otherwise you’re just going to need to Google 'impact investment funds' and follow the cookie trail.
“I would obviously recommend that everyone comes to us [Good With Money],” she adds. “We have banking, investment, insurance. So if you’re interested in greening your entire financial life, you can find out how to do that through us.”
She also highlights Trustnet as a really good source for fund information, but flags that it can be a bit overwhelming for first-timers, so “you’re going to want to do a little bit of reading before you get there.”
Essentially, if you don’t want to overload, “you want to do a little bit of Googling, and then see what piques your interest.
“But the next step is basically to open an investment account with a low-cost fund platform so that you can then start to invest,” she says.
And, on the Good With Money website, there’s something called the Good Investment Review, which lists the top 300 sustainable funds in the country and is another very good place to start.
What are the best platforms to start with?
If you’ve made it this far, you should have a read of the Good Guide to Impact Investing, which has a great section on fund platforms.
With a fund platform, scale is important because a larger platform is more likely to have the funds you want — so the guide only focuses on those with about 2,000 to 3,000 funds available.
The Good Guide looks at five of the largest platforms: Hargreaves Lansdown, Interactive Investor, Fidelity Personal Investing, Barclays Stockbrokers, and AJ Bell Youinvest. You can find out more about each of these here.
“You open an account with them, which takes two minutes,” says Jones. “Then you open a stocks and shares ISA, and then you invest in what you want to invest in through the platform. So they’re the gateway.”
What do I need to be thinking about?
There are three main things to keep in mind right from the beginning, according to the Good Guide:
- How much do you want to invest?
- How long do you want to invest for?
- What sort of return are you looking for?
These are questions that only you can answer (probably after some more background research), but they're great things for you to be thinking about right away based on your own personal situation.
One more thing, is that there aren't currently industry-wide definitions for what makes something a really good investment in terms of impact. Policies for "impact" vary from investment manager to investment manager, says Jones, and so the investor really needs to put the time and effort in to fully understand the product they're investing in.
The EU Commision and the UK Investment Association are currently consulting on creating a standard set of definitions, but it's likely not going to come soon.
However, one of the most common ways to define impact is the Global Goals: investing in a company according to whether its products and/or services contribute directly to the achievement of one or more of these goals. According to Jones, this is "becoming somewhat of the gold standard in impact."
"Again though, investors should be careful to study the policy closely and focus on the things that are most important for them," she adds. "Increasingly, this is zero fossil fuels and any real impact fund shouldn't include them."
What could go wrong and how can I avoid it?
The top tip, according to Jones, is essentially just don’t put too much money in.
“If you really feel very unconfident, find something that excites you [on one of the platforms]” she says.
“I walked a friend of mine through the process,” she continues. “Here’s this project I said, you’re really passionate about it, you could lose all your money, you know that? And she’s like, it’s fine, it’s £50. And that got her through the door.
“So she’s invested, but she’s also like, ‘If I lose it, fine’,” continues Jones. “And I’ll just keep an eye on it, so her confidence slowly built, then she invested a little more in another project, and she thought, this is fine.
“Then she built on that to opening up her own self-invested personal pension and started to manage her own pension assets,” she says.
So just start small. For example, putting £25 a month into a fund, and then look at it as little as possible.
“That’s another top tip, don’t look at it every day, because markets go up and down,” says Jones. “Ideally, you want to look at it once every three to six months. Just forget it’s there. And then at the end of the year … you should be pleasantly surprised.”
Something to note is that the FCA recommends that investors don’t put more than 10% of their investable wealth (not including property or emergency “rainy day” savings) into unlisted companies or projects in any one year.
Impact investment is not a risk-free investment, and the returns aren’t guaranteed. If you were to lose some or all of your capital, you wouldn’t be able to get redress from the UK’s FInancial Services Compensation Scheme, or complain to the Financial Ombudsman Service — so it is highly recommended that you’re careful with the amount you invest.