Have you ever thought the only way you can make a positive impact with money is to give it away? That’s not the case. Socially screened funds, community investing and spending with organizations you love are also ways that money can be activated for good. In this article we’ll cover the basics of these first two concepts, and I’ll provide resources to learn more.
What are Socially Screened Funds?
I’ll start with socially screened funds, which are the ones our clients at Natural Investments are most familiar with. All mutual funds and exchange traded funds (ETF) follow a mandate or “recipe” for what they invest in. Some might focus on a sector like healthcare or technology, others may focus on geography, while others might track an index like the S&P 500. At Natural Investments we focus on funds that use a variety of environmental, social, and governance (ESG) screens.
Environmental screens could filter out companies focused on fossil fuel exploration and those that contribute to deforestation. Social screens might exclude weapons manufacturing and private prisons. As for governance, this focuses more on screening for companies based on positive criteria like board diversity, transparency, and board oversight. This type of investing has become more mainstream since NI’s founder started over 40 years ago. According to the responsible investment trade association, US SIF, 11% of all U.S. investments are now classified as sustainable.
Because the term ESG is not formally defined or regulated, there is always the concern for greenwashing. At NI we continuously evaluate more than 200 different ESG funds and rate them according to how well they fulfill ESG criteria, engage in shareholder advocacy, and place cash into community development financial institutions. You can find the result of this work over at our Natural Investments’ Heart Rating page.
What is Community Investing?
Community investing supports overlooked and underserved community development projects such as affordable housing, small businesses, community hubs, and health care and educational facilities. NI regularly reviews these public and private opportunities, and we recommend them to clients routinely. At any point we usually have many options available, so the types of investments NI has approved can be found here. While some community investments require investors to be accredited, meaning they fulfill specific net worth or income criteria, or may only open to residents of certain location, most are open to everyone. Speak with your NI advisor to learn more about what is currently available.
While ESG investing is executed just like any other type of investing through a custodian like Charles Schwab & Co., community investing requires a few more steps. First, what do you want to invest in? Do your wish to help reduce the racial wealth gap? Check out Hope Credit Union and the Capital Good Fund as examples of how they address this. Are you more interested in a transition to regenerative agriculture? Learn more about the Black Farmer Fund and Iroquois Valley Farmland REIT. Once you’ve decided what you want to invest in, an agreement needs to be signed specifying terms, such as the amount to be invested, the length of the investment term, and either the interest rate return for a bond or the payout percentage for equity.
For me what is most exciting about community investing is that it works to create a more just economy. For further information on community investing, look at the Impact Assets’ 50 Manager Showcase and the Transformative 25, organizations that review new community investments and select the most promising ones that focus on creating an economy where everyone can flourish.
Giving to an organization helps fit one-time needs, and multi-year pledges can help stabilize them. Yet investment facilitates more economic power than philanthropy. Moreover, community investments often serve as testing grounds for a solidarity economy, leading the way toward creating co-ops and other types of integrative capital.
Will making this positive impact on others harm my own goals?
Like with anything, we all tend to be cautious when it comes to the new and unknown. You might be thinking, creating an economy where everyone can flourish sounds great, but if I start investing that way, what will the returns be? Will my family and I still be able to flourish?
As with any investment, there are no guarantees, but research has long shown that one doesn’t need to compromise return by integrating values into our choices. Investing is designed to generate a positive return and much depends on the level of risk you and your family can take. Plus, some impact investments offer a range of market to below-market returns. This is an important conversation to have with your financial advisor to find the best approach for you. You might decide, for example, to screen 100% of your public investments and commit 10% of your portfolio to community investing. Or you might hold legacy stocks you inherited and are not ready to sell, and then gradually sell them as you deepen your commitment to ESG-screened investments while keeping in mind tax planning consequences.
These are the types of questions that I love thinking through with clients. There is no one-size-fits-all-approach, and it’s important to be thoughtful and not rush through these decisions. As a deep thinker who takes time to deliberate, I empathize with clients who are navigating these decisions and strive to help them make suitable choices.
Diana Gisel Yañez, CFP®, RLP® is on a mission to expand access to comprehensive financial planning. As a Registered Life Planner® and a Certified Financial Planner® she helps clients cultivate clarity on what they want to create in their lives. She has hosted the Highly Sensitive Money podcast since 2024.