Channel Your Impact With a Self-Directed IRA – Business Quick Magazine

The primary goal of investing money is to generate a financial return. But a growing number of individuals today are also supporting causes they believe in by investing their money in ways that align with their views about social causes and issues.

Known as socially responsible investing or impact investing, this strategy enables you to invest in businesses that support causes and issues you believe in. On the flip side, you can also avoid investing in businesses that produce products, provide services or are involved in activities that conflict with your beliefs.

Practicing impact investing allows you to align your investment allocations with your personal beliefs and values. As an impact investor, environmental, social and corporate governance (ESG) criteria have equal footing with the balance sheet when deciding how to allocate your investment portfolio. Your goal is to positively impact society, or avoid negatively impacting society, with your investments while also generating above average investment returns.

Dramatic Growth

Impact investing has grown dramatically over the past decade. The amount of money held in ESG assets increased by 274% between 2012 and 2018, rising from $3.1 trillion to $11.6 trillion during this time, according to the Forum for Sustainable and Responsible Investment’s (US SIF) 2018 Report on U.S. Sustainable, Responsible and Impact Investing Trends.

This was up 38 percent from 2016 and represents approximately one out of every four of the $46.6 trillion dollars in total assets under professional management in the U.S. More than half (57 percent) of U.S. investors now believe that the impact of their investments on society is either very or somewhat important, according to a study conducted in 2019 by American Century Investments. And about one-third (30 percent) are familiar with impact investing.

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The growth of impact investing is being driven largely by Millennials and members of Generation Z who want to make a difference in the world with their investment dollars. According to the American Century Investments study, 65 percent of Millennials in the U.S. have shown heightened interest in impact investing. This compares to 55 percent of Gen Xers and 49 percent of baby boomers.

 “The findings of our study reaffirm that interest in impact investing continues to be on an upward trajectory across all age groups, but most importantly, it is encouraging to see that Millennials are in the driver’s seat for impact investing,” stated Guillaum Mascotto, head of ESG and investment stewardship at American Century Investments.

A Bright Future

Impact investing could grow even more over the next decade when you consider demographic trends. For example, Millennials are projected to make up about 75 percent of the U.S. workforce by 2025. And by 2030, Millennials are projected to hold five times more wealth than they do today. In addition, Millennials and members of Generation Z will inherit more than $68 trillion from baby boomers over the next three decades in what’s dubbed as “the great wealth transfer” that will be unprecedented in U.S. history.

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Millennials and members of Generation Z are driving what has been called “the era of the conscious consumer” by making a conscious effort to shop organically and buy products from companies with ESG objectives. So it’s not surprising that many of them are also making investing decisions based on their personal values and beliefs, as well as demanding more transparency from their investments.

How to Invest with Impact

You can practice impact investing by either investing in businesses that actively promote practices that align with your core values and beliefs, or avoiding investments in businesses that participate in practices that you find morally or socially objectionable. With this strategy, known as negative screening, you would identify certain kinds of businesses that should be avoided with your investment dollars, such as businesses in the alcohol, tobacco, gaming or pornography industries.

There is a growing number of mutual funds and exchange traded funds (ETFs) that use ESG criteria in choosing companies to invest in. US SIF has published a list of more than 200 ESG funds that includes detailed guidance on the ESG criteria considered by each fund, along with financial information such as fund size, type, ticker symbol, month of inception, performance history, management fees and expense ratios.

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So what are the social and environmental causes that matter most to investors today? According to the American Century Investments study, “healthcare/disease prevention and cures” tops the list at 30 percent. This is followed by “environment/sustainability,” “improved education,” “mitigating poverty,” “gender equality” and “alignment with religious principles.”

Impact Investing and Self-Directed IRAs

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A self-directed IRA can be a great vehicle for building your retirement savings in a tax-advantaged environment while making a meaningful difference. Typical IRAs with a brokerage firm, bank or mutual fund company offer a limited and indirect way to choose ESG funds, but self-directed IRAs open up more ways for socially conscious investors to channel an impact in causes and issues that matter to you.

The information provided in this article is educational content and not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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