Impact Investing: Invest In Your Principles & Your Retirement
By Curtis Glovier
Hardly a day goes by without a new headline about the rise of impact investing. Whether the article refers to the category as environmental, social and governance (ESG) investing, socially responsible investing (SRI) or sustainable investing, the storyline is usually the same — impact investing is skyrocketing in popularity.
Investors are increasingly seeking ways to align their investments with their values — whether that means building a carbon-neutral portfolio, investing in companies committed to diversity or avoiding those that make or sell weapons or tobacco.
Impact investing not only provides investors with a tool for addressing their environmental and social concerns, but it also allows them to take a stand on issues that are core to their beliefs. And that’s what makes impact investing a natural fit for self-directed IRA investors, like those my company serves.
Impact Investing’s Heady Growth
According to the 2017 Global Investor Study from asset manager Schroders, 75% of U.S. investors said they had increased their allocation to sustainable investment funds in the past five years, and 82% said sustainable investing had become more important over that period.
As a result, global socially responsible investments are climbing — jumping 34% from 2016 to 2018 to stand at $30.7 trillion, according to the Global Sustainable Investment Alliance. In response, the financial services industry is launching a slew of new exchange-traded funds (ETFs) and mutual funds aimed at this socially conscious universe of investors.
While buying ETFs and mutual funds is one way to add environmentally and socially conscious investments to your portfolio, it is not the only way. Investors can also channel their impact investments — and their retirement savings — into a self-directed IRA.
Impact Investing With A Self-Directed IRA
Self-directed IRAs put you in the driver’s seat when it comes to managing your retirement savings. While you can use a self-directed IRA to invest in exchange-traded assets, such as stocks, bonds and mutual funds, you can also use it to invest in an array of alternative assets of your choosing including real estate, private companies and hedge funds. The IRS only explicitly prevents you from owning life insurance and collectibles in your IRA.
This means self-directed IRAs can be a good vehicle for expressing your views on ESG and SRI investing. You can use your expertise and personal knowledge about an industry to invest your retirement dollars outside the box and take a hands-on approach to impact investing initiatives.
• If your expertise is in real estate, you can invest in green building.
• If you are passionate about natural resources, you can buy sustainably managed farmland.
• If your background is in private equity, you can support startups that are committed to diversity and inclusion.
Or you can approach impact investing from another angle:
• If your concern is climate change, you can invest in a limited liability company with your IRA dollars to fund clean energy companies.
• If you’re worried about plastics, you can invest in a startup devoted to alternative packaging.
• If you want to decrease greenhouse gas emissions, you can support real estate developments located near mass transit.
Using Tax-Advantaged Dollars To Make An Impact
Pursuing impact-related opportunities with a self-directed IRA comes with the added benefit of investing with tax-advantaged dollars. When you own an impact investment in a self-directed traditional IRA, returns can compound year after year on a tax-deferred basis. If you hold ESG and SRI investments in a self-directed Roth IRA, account growth may accumulate tax-free.
While using your self-directed IRA to pursue impact investing may feel rewarding, it should also make financial sense. Impact investments should not be held to a lesser standard than any other investment in your retirement portfolio. After all, the point of an IRA is to fund your retirement. ESG and SRI investments require thorough vetting to ensure they meet your financial goals and risk tolerance. I also advise working with investment professionals — such as financial advisors or tax attorneys — who can help assess the suitability of the opportunity you are considering while also ensuring your IRA remains compliant with IRS rules and regulations.
With investors displaying a heightened desire to “doing well while doing good,” impact investing with your self-directed IRA may allow you to do well for your retirement while also doing good for your values.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.