Impact funds, a category of purpose-driven investment strategies, empower clients to make a direct, measurable social or environmental impact while also generating long-term financial returns.
Invest for Purpose
How To Incorporate Impact Investing To Your Strategy
4 min read
Key Takeaways
- Social impact investing funds take a specific approach to ESG investing that seeks to make a direct, measurable social or environmental impact while also generating a financial return.
- For some investors, impact investing funds have grown more important in the wake of the COVID-19 pandemic, which highlighted the challenges many disadvantaged communities face.
- Municipal bonds offer several ways to invest for purpose, and they’re well-suited for impact investing. That’s because muni bond issues often finance projects intended to make advances in areas such as education and access to clean water. Munis also offer tax advantages to investors and have the potential to diversify portfolios.
- To determine whether a municipal impact fund makes sense for a specific client, it’s important to understand the full picture: goals, preferences, risk tolerances, tax situation and level of interest in impact investing.
What’s an impact investment fund?
Investors have wide-ranging environmental, social and governance (ESG) approaches to choose from when they’re seeking to invest for purpose by incorporating ESG in their strategies.
Some investors, for example, might want to exclude certain industries or sectors that don’t align with their own values. Others might be looking for a strategy that integrates ESG considerations in the fundamental analysis of each issuer. Still, others may want approaches that go beyond ESG integration to embrace specific ESG-related objectives, such as sustainability or impact.
Among the avenues for social impact investment funds to pursue are clean-water initiatives, economic development in historically marginalized communities and special-needs education organizations.
Why is impact investing important to clients?
Impact funds have characteristics that can be appealing to investors. For one thing, they offer a way to make an impact on underserved communities while also generating a long-term financial return. And because impact funds differ from various other types of funds, they have the potential to enhance overall portfolio diversification.
The COVID-19 pandemic magnified the need—and demand—for ESG strategies broadly. The pandemic has caused lasting hardship for many communities, from both an economic and social perspective, and many investors want to play their parts in the solution. In recent years, the universe of ESG-focused funds, including impact funds, has experienced very strong growth, as investors learn more about their potential.
Generating financial returns is important to impact investing funds, but it’s not the only benchmark of success for many investors. Money from these types of funds is directed toward investments intended to make a concrete, positive impact on specific communities. So, through impact investing funds, investors can contribute to a collective effort to drive change at a local, national or global scale.
The municipal bond market offers investors a variety of approaches to ESG investing, including impact funds. The character of the municipal market makes it well-suited to impact investing, because municipal governments are responsible for building and upgrading the physical infrastructure and public goods that help create a more inclusive and empowering local economy and communities. These initiatives, whether it’s replacing hazardous lead water lines or promoting equity in school systems, are often funded by dedicated municipal project bonds.
Can impact investing generate attractive returns?
With impact funds, harnessing investors’ capital to generate financial returns while also advancing initiatives intended to improve society aretwo sides of the same coin. Clients who invest in impact funds don’tnecessarily have to sacrifice financial returns in the process.
US municipal bonds offer diverse avenues for making an impact, because funded projects often focus on infrastructure improvements atthe state and local levels. Given the recent government emphasis onbuilding out better infrastructure, abundant impact opportunities existfor investors in the municipal bond arena: in fact, roughly one-third ofthe massive municipal bond market offers direct impact opportunities.
In our view, the key to success in impact investing is to thoroughly assess the fundamental condition of individual issuers and engage with them to advocate progress.
Active engagement is also a pillar in ensuring that investments through a municipal impact fund are having the intended impact on specific communities. In our view, a thoroughly researched, thoughtfully designed municipal impact fund has the potential to drive better outcomes for communities while also earning an attractive return.
How can I help my clients invest in impact funds?
There are many avenues to invest responsibly, from excluding industries that don’t align with investors’ values to strategies that have specific ESG objectives in addition to delivering financial returns, including sustainable funds and impact funds. When a financial advisor is developing a complete picture of a client’s goals, preferences and risk tolerances, identifying their interest in investing for purpose should be part of the conversation.
For clients interested in impact investing funds, which seek to make a direct, measurable social or environmental impact, the municipal bond market offers wide-ranging opportunities. Many securities direct their proceeds to specific initiatives intended to advance local communities, from schools to water delivery and health services.
Municipal bonds carry the added benefit of favorable tax treatment on income received, which is tax-exempt at the federal—and often state—levels. This may be an additional compelling proposition for those clients seeking to reduce the bite of taxes on their taxable accounts.