Those of us who are fortunate enough to have savings have a wide variety of options when it comes to investing our money. Depending on your goals and your investment horizon you can choose to invest in risky growth stocks, just keep your money in your savings account, or everything in between.
Now consider what happens if you also take into consideration the social and environmental impact that can be attributed to your investments. To keep things simple, let’s assume that you just have the following three investment options:
|Investment Type||Expected Financial Return||Expected Social Return|
Each of these investment options has both an expected financial return and an expected social return (they would also all have different risks, but let’s ignore that for the moment). The social return represents the social or environmental good that the company being invested in is expected to create.
For example, the conventional investment might be in a company that is growing quickly and creating products that people love to use, but that maintains harsh working conditions at its developing world factories, leading to a net negative social return.
The impact investment, on the other hand, might be in an enterprise like an organic farm or a microlender that is expected to generate both a financial return and a positive social return.
Finally, the philanthropic investment may represent a donation to your favourite charity, one that you expect to be very effective at turning your money into a positive social return.
The returns here are just for illustrative purposes, and they may not actually be representative of the returns you can expect from these three investment options.
There are many potential impact maximising strategies
Suppose that your investment goal is to maximise the total impact, that is the total social return, that your money creates over your lifetime. There are a number of strategies you could propose to do this.
You could follow the “Warren Buffett” approach of sticking with the high-yielding conventional investment, even if the interim social return is small or negative, growing your investment as much as possible before converting it all into a social return by donating it at the end of your life.
Alternatively, you might elect to immediately donate all of your money, betting that the initial social return that your donation creates will continue to compound over your lifetime as the people that you helped go on to help others and “pay it forward”.
Or you might choose to take the middle path and invest your money in the impact investment, preserving and growing your investment while also generating social returns. And in addition to these three basic strategies, there are an infinite number of ways to divide your investments between the three options.
Given these investment options, how would you choose to invest?
Let us know what your intuitions are in the comments below.