As the gender gap in the investing world continues to shrink, emerging data seems to suggest something unsurprising — in general, women invest differently than men.
That differing approach manifests in many ways, but one of the most interesting is an increased focus on the ethical side of investing. The female investor seems more drawn to impact investing, a strategy built around the idea that where you put your money has environmental, social and political consequences as well as financial.
So how does impact investing work, and why is it so attractive to female investors? We’ve got the answers you need, along with some things to consider before trying it yourself.
What Is Impact Investing?
Impact investing is the concept of investing in companies with a social, environmental or ethical mission, while avoiding companies that clash with the investor’s values. It’s a similar concept to boycotting consumer products made by companies you don’t want to support, while making a point to buy from companies you admire.
When you purchase an index fund, you may be buying shares of companies that promote smoking, fossil fuels or other initiatives you don’t agree with. By choosing impact investing, you can weed out those companies in favor of operations that more closely align with your moral compass.
Socially Responsible Investing (SRI) and Environmental, Social, and Corporate Governance (ESG) are other terms for impact investing. There are some minor differences between the three concepts, but they generally refer to investing in companies that care about making a positive difference in the world.
Why Women Are Gravitating Towards Impact Investing
Marie Thomasson, a CFP and financial planner at Modern Assets LA, thinks that women believe more in impact investing because it affects their lives on a day-to-day basis.
Women naturally benefit from ESG investing.
“From maternity leave policies, sustainability initiatives that affect our families and communities to a commitment to gender diversity on boards, women naturally benefit from ESG investing,” she told The Money Manual.
Mark Struthers, CFP at Sona Wealth Advisors, said he thinks women don’t mind sacrificing returns if it means supporting companies they believe in.
“Ten-plus years ago, it was almost always women who were interested in SRI investing,” he said.
How To Invest In Socially Responsible Funds
Many brokerage firms provide a variety of ESG or SRI funds for investors to choose from. For example, if you have an IRA at Vanguard, you can choose to invest in Vanguard’s ESG funds.
Your employer-sponsored 401(k) or 403(b) may also have ESG or SRI funds available, but this depends on your employer. View your plan documents to see what funds are available.
Robo advisors like Ellevest and Betterment also offer impact investments as part of a well-rounded portfolio. For example, the Ellevest Impact Portfolio is divided between traditional funds and impact funds that focus on women in leadership, community development and sustainable practices. The fees range from .13% to .19%, which are similar to other passively-managed funds.
BlackRock has funds that mimic S&P 500 index funds while minimizing exposure to non-ESG companies. Companies in the firearm, tobacco, oil and coal industries are not represented in these funds.
What To Know About Impact Investing
Experts disagree on whether you can build a diversified and profitable portfolio only using SRI and ESG funds.
“There are close to no fixed-income ESG funds, so you’d have to invest in green or impact bonds, and those are unlikely available on the standard retail platforms,” said financial planner Maya Tussing of Fairlight Advisors.
Another potential downside to impact investing is that many ESG funds are actively-managed, meaning they have higher fees than non-ESG funds. This can impact your total return unfavorably. There are some passively-managed ESG funds, but these are often vetted less carefully and may still include problematic companies.
Other experts argue that because consumers increasingly prioritize environmental, social and ethical responsibility, companies focused on those issues will inherently do better than ones that don’t.
Why Impact Investing Isn’t Perfect
Even though impact investing is a step in the right direction, it’s also impossible to find funds that perfectly filter out controversial companies. Depending on your personal preferences, you may discover that SRI and ESG funds include companies that don’t adhere to your values, either through questionable business practices or by donating to politicians you don’t like.
You can’t have it all with ESG.
For example, many ESG and SRI funds include major companies like Apple, Amazon and Chase. If you disagree with Amazon’s business practices or Chase’s fee structure, you may be disappointed to discover them in your impact portfolio.
Tussing points out Tesla as an example of this. The company makes products designed to help the environment, but CEO Elon Musk is a divisive leader who has made inappropriate comments about gender. Whether or not Tesla would fit within your definition of impact investing depends on your specific priorities and values.
“You can’t have it all with ESG,” she said.
Feature Illustration: Laura Caseley For The Money Manual