Five ways to understand impact investment risk

Written by Gareth Griffiths on 7th Sep 2021

This article is an excerpt from the Good Guide to First Time Investing, sponsored by impact investing specialist Triodos Bank. Download your free copy to find out how to get started with investing for good.

As individuals we take risks every day. For the most part we do these unconsciously, such as driving a car, riding a bike, or crossing a road. However, being consciously aware of taking a risk and trying to weigh up the pros and cons associated with it can be unnerving for anyone.

This can be the same for first-time potential impact investors as, like any investment, it’s different to putting your money into a savings account, because the value of your investment can go down as well as up and you may not get back the amount you originally invested. But while investment risk should always be taken seriously, there are things you can do to gain a better understanding of risk and what levels you may be comfortable with to help alleviate this daunting feeling.

A good place to begin is to ask questions of yourself, your money and, in the case of impact investment, your values and what you’re passionate about supporting. Here’s how many of our investors start their journey towards understanding impact investment risk:


1. What are your short-term and longer-term money goals?

Mapping out your short-term and long-term goals is a great place to start. Once these are clear it’s easier to understand what you’d want this investment to do, for example to generate a return to save for a big life event or for future financial security?

In addition, do you have savings that could support any short-term or unplanned costs? Due to the risk involved in investments, returns aren’t guaranteed so it’s worth considering having cash savings set aside as well.


2. What amount of money do you want to consider investing and for how long?

Next is identifying what money you can afford to invest and how long you’d be comfortable with it being invested. Our impact investments have been designed to be long-term – five years or more – so not suitable for those wanting short-term gains and access to their money.

While you can take your money out from our funds should you need to, investing for five years or more increases your chances of being able to ride out any short-term volatility in the market. Be aware there is always risk associated with investing as investments can go up as well as down and you may not get your capital back.


3. What’s important to me?

Broadly this starts with establishing the answers to questions like ‘What are my values and how do I want to align my investment to those?’. This helps to be clear about which investments might appeal. With regards to our impact investments these support globally listed companies which are moving towards greater sustainability, smaller listed companies that are pioneering in the field of sustainability and bonds or UK government bonds that support our impact themes.


4. Is this the right provider and do I understand the fees and charges?

When exploring the marketplace, you should look for a provider you trust and whose vision aligns with yours. This also includes understanding what your money would be invested in and for what purpose, the fees and charges involved, and clarity on what the expected impact is. These answers should always be very clear and don’t be afraid to ask for more information if not. There has recently been a rise in investment fraud as well.

And, finally does the provider understand the investment risks and opportunities involved with each underlying holding in the investment, to deliver the best possible management of investors’ money?


5. Have I got other investments?

If you have other investments, some investors like to diversify their investments with impact investments. This helps to spread your risk by having a portfolio of investments with different risks associated with it. You might like to consider lower risk products like bonds if you hold lots of higher risk investments such as equity (also known as shares).


We always talk about all the risks associated with investments such as our Impact Investment Funds. These are always clear and there’s supplementary information available under each fund page on our website.

Impact investing is one of our most important levers for change. It is one of the most powerful things people can do to help tackle the climate crisis, uniting to become a force for good.

However, before embarking on investing, individual research is key. The promotional information in this article is not financial advice, and if you are unsure about whether any investment product meets your needs then you should seek the advice of an independent financial adviser.

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