Right on the Money: What is impact investing and how do you do it?

In his regular green financial-planning column, Tony Fuller of Path Financial looks at the rise of impact investing – investment strategies and portfolios designed to generate a measurable positive impact for people or planet as well as a financial return.

For many people concerned about climate change and social justice, ethical investing begins with the idea of avoiding harm. That might mean excluding fossil fuels, arms manufacturers or companies with poor environmental and labour practices from an investment portfolio.

But increasingly, investors are also considering whether their money can actively contribute to solutions rather than solely avoiding harm. This is where impact investing comes in.

Impact investing has become one of the fastest-growing areas of sustainable finance.  The term is often used loosely, and the line between “ethical”, “sustainable” and “impact” investing is not always clear. Understanding the distinction matters if you want to consider investing ethically. 

What is impact investing?

Impact investing aims to move beyond simply owning “better” companies and towards creating measurable positive outcomes in the real world. At its core, it means investing with the intention of generating:

• a financial return, and
• a measurable positive social or environmental impact

That second part is important. Impact investing is not just about avoiding harm or choosing companies with good ‘ESG’ (Environmental, Social, Governance) ratings. It is about directing capital towards activities that are actually helping to solve real-world challenges.

Examples might include investments supporting renewable energy infrastructure, affordable or sustainable housing, healthcare access, community development, sustainable agriculture or climate adaptation and resilience.

In other words, the investment is specifically designed to contribute towards positive outcomes alongside financial returns.

The challenge of measuring “impact”

One reason impact investing can feel confusing is that impact itself is not always easy to define. Financial returns are relatively straightforward to measure. Environmental and social outcomes are more complicated.

Depending on their focus, impact investments may report on different things, such as carbon emissions avoided, renewable energy generated, affordable homes created, increases in access to healthcare or education, biodiversity outcomes and jobs supported in underserved communities.  This can make comparing investments difficult, and there may be a genuine risk of greenwashing — where products overstate or oversimplify their impact claims.  Different firms also use different methodologies and goalposts to report their metrics which can make it difficult to compare investments on a level playing field.

For this reason, many thoughtful investors increasingly look beyond marketing language and ask deeper questions like ‘is the impact measurable?’ or ‘Would this activity have happened anyway?’.  The reality is that meaningful impact investing often involves nuance rather than simple labels.

Public markets vs direct impact

Another common misconception is that impact investing only happens through small community projects or specialist private investments. In reality, impact approaches can exist across a spectrum.

Public market impact investing

This involves investing through diversified funds holding shares or bonds in listed companies that contribute to environmental or social solutions. The most common way of doing this for most people is via their pension which is where most people in the UK have invested wealth.

Advantages include:

• diversification
• liquidity
• accessibility
• professional oversight

However, the connection between your investment and real-world impact can sometimes feel indirect.

Direct or community impact investing

These could include things like community energy projects, social housing initiatives, local climate enterprises and co-operatives or social enterprises.

These investments can feel far more tangible and place-based, but they are often focused and less diversified, potentially illiquid (i.e. it’s harder to sell and get your money out) and may carry higher risk. A common financial planning principle is to avoid allocating significant portions of wealth to higher-risk, less diversified investments.

For many people, the answer is not choosing one or the other, but understanding the role each can play and using whatever is suitable for your own financial position and values.

Impact investing and risk

A common assumption is that impact investing automatically means lower returns or higher risk. Sometimes that can be true, but not always.

Like any investment approach, outcomes depend on the assets involved, the level of diversification, how long you invest for, fees and market conditions. With impact investing you will necessarily be investing in a basket of stuff that could be very different from a ‘conventional’ portfolio that includes all asset classes.  Market conditions can therefore make a difference. For example, if asset classes that are excluded from your impact investing portfolio (e.g. fossil fuels) perform strongly, you could ‘underperform’ a portfolio that includes them.  Conversely, if areas where you have more focus do well (e.g. renewable energy), then that could be good for investment returns. 

Importantly, “positive impact” does not remove investment risk. Investments can still fall in value, and some areas of impact investing, particularly smaller private or community investments, can carry significant liquidity and concentration risk.  Even within a very diversified impact strategy using diversified bond/equity funds, it is true that there is more concentration of risk than in a traditional diversified portfolio which includes a broader range of sectors.

Why impact investing resonates with climate-conscious investors

For many environmentally conscious people, impact investing offers something traditional investing often lacks: a stronger sense of connection between money and outcomes.

Rather than simply minimising harm, it asks:

• What is my money helping make possible?
• What kind of future is it supporting?

That shift can feel empowering, particularly at a time when many people feel disconnected from financial systems or frustrated by the slow pace of political change.

But perhaps the most important thing is recognising that impact investing is not about perfection. No investment is completely pure, and all investing involves trade-offs.

A growing part of the financial landscape

As climate and social challenges become more urgent, impact investing is likely to play an increasingly important role in how capital is allocated.

For investors, the challenge is not simply finding investments labelled “impact”, but understanding how impact is being measured, what trade-offs exist and how different approaches fit alongside your long-term financial goals

Impact investing can become part of a wider relationship with money which balances financial objectives with a desire to contribute positively to the world around us.