How to Make a Positive Impact with Your Finances
Jan 27, 2022
Feb 08, 2022
Americans have nearly $10 trillion in aggregate savings, including nearly $4 trillion at Bank of America, JPMorgan Chase, and Wells Fargo. Meanwhile, there's about $35 trillion in total U.S. retirement assets. While it might not seem like a lot of money divided between 300 million Americans, $45 trillion is more than enough money to move the needle when it comes to climate action or social justice.
Until recently, there were very few options for everyday people looking to make an impact with their savings or investments. Most impact investments were only available to accredited investors with a gross income of more than $200,000 or a net worth exceeding $1 million. But fortunately, a combination of regulatory changes and new startups have opened the door to exciting possibilities.
Let's look at what impact investing means and how you can make an impact across different areas of your finances.
What is Impact Investing?
There are many different terms for banking products and investments that make a positive impact on the world. For instance, you may hear impact investing, ESG, socially responsible investing (SRI), green investing, conscious investing, and mission-driven investing. All these terms describe aligning your financial goals with your values, so we simply refer to them as impact products or investments.
Impact banking products and investments seek a positive, measurable social and environmental impact along with a financial return. In other words, you're putting your money to work for a good cause without making it a donation. These products might be market-rate—meaning they have a financial return comparable to a non-impact asset—or below-market—meaning they sacrifice some return potential for a good cause.
Most impact products target one or more of the UN's Sustainable Development Goals (or SDGs).
Some examples of impact products include:
- A bank that lends to underserved low-income communities rather than large corporations, helping build wealth from the bottom-up rather than the top-down.
- A lender that funds affordable housing projects rather than high-end real estate developments that contribute to the housing affordability crisis.
- An investment in a utility-scale solar project or sustainable farm rather than Apple or Exxon Mobil, helping move the needle in building a more sustainable world.
Many of these products provide a similar risk and return profile to their traditional counterparts. For example, banks serving low-income communities use slightly higher interest rates and portfolio diversification to deliver comparable risk-adjusted returns. Some products even offer above-market returns thanks to their lower infrastructure costs or other innovations, such as online-only neobanks.
Ways to Make an Impact
Most impact products fit into broad financial categories known as asset classes. Each asset class has a distinct combination of risk-return characteristics that make it well-suited to achieve specific goals. For example, cash and stocks are two asset classes. You might prefer cash if you need to make a significant purchase in a few days since it won't decline in value—but it's not ideal for your retirement account.
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The most common asset classes are:
- Cash - Cash provides immediate liquidity, meaning you can access it anytime in just a few minutes. Banks also offer FDIC insurance of up to $250,000, meaning your money is very safe. However, you usually won't make enough interest to beat the inflation rate, so your buying power will decrease over time.
- Cash Alternatives - Cash alternatives are investments like money market funds, certificates of deposit (CDs), and short-term notes. While they are usually pretty safe, they provide less liquidity than cash (you can't sell whenever you want) and could lose value. But in return, they offer more interest than cash in the bank.
- Fixed Income - Fixed-income investments include long-term notes, bonds, and bond funds. When you invest in fixed-income, you're essentially loaning money to a borrower that will pay you back with interest. Most fixed-income investments make regular interest payments on a monthly or quarterly basis, providing a steady source of income. But, your money is locked up for a long time and there's no guarantee that the borrower won't default.
- Public Equities - Buying stock in a company gives you a fractional ownership stake. As the company's value rises or falls, so does the value of your shares. Most stocks have excellent liquidity and can increase substantially in value. The drawback is that they can also move down just as quickly and don't provide much income. That said, they are one of the best ways to grow your money.
- Private Investments - Private debt and equity are similar to public stocks and bonds, but they're not traded on a public stock exchange, so you cannot easily buy and sell them. For instance, imagine owning a 10% stake in your neighborhood bakery—how would you find a buyer if you wanted to sell? The good news is that these investments can offer significant upside potential, and you usually have a lot more involvement in the business.
- Alternative Assets - Alternative assets encompass every other investment that's not debt or equity in a private or public company. The most common examples are real estate, natural resources, and collectibles. Obviously, these investments' risk and return profiles vary widely given the many possibilities.
There are impact opportunities in each of these asset classes. For example, Atmos is a climate-focused bank where you can park your cash and Small Change lets you invest in affordable housing projects (alternative assets). VirtueScout has over 30 different impact products broken down into these different categories, including reviews of many offerings to help you decide on the best option.
Some asset classes are restricted to accredited investors—or those earning more than $200,000 per year or having a net worth of more than $1 million, excluding their primary residence. But fortunately, the passage of the JOBS Act in 2012 paved the way for crowdfunding, enabling anyone to invest in certain private companies. A growing number of platforms are starting to democratize finance—including many in the impact space.
An Example of Impact
John and his family have an emergency savings account with six months of income, or about $30,000, in a climate-focused bank account earning an above-market interest rate. In addition, they're saving up for a house by purchasing short-term notes that support affordable housing and earn an even higher interest rate, achieving two goals at once!
In addition to their cash and short-term savings, John has about three-quarters of his retirement investments in an S&P 500 index fund that votes shares in favor of ESG proposals (VOTE). The rest of his assets are spread out across private crowdfunding opportunities, supporting affordable housing, renewable energy, and small businesses.
John's financial returns are the same as any other investor, but rather than sticking with the status quo, he is actively making a positive difference in the world. And, that's the power of impact investing—you can make a difference without changing or sacrificing anything.
The Bottom Line
There are many ways that you can make a positive impact on the world, but impact products and investing are some of the best. By putting capital to work for good, everyday people can move the needle when it comes to climate action or social justice goals.
VirtueScout was built to help you in the journey to making a bigger impact by helping you find the right products for your needs. Browse our database to find impact opportunities today.