"Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society."- Larry Fink, CEO of BlackRock.
Recently, as Impact Investing has gained more attention in the investment world, we have received a number of questions from clients and prospective clients about what it is, whether it is a viable strategy, how it can be implemented into an existing investment strategy and whether we currently offer impact investing strategies to our clients. Given the frequency of these questions we wanted to share this article to shed some light on the subject.
It should be made clear that we do not currently have a specific strategy dedicated to impact investing and it is not commonly a mitigating factor in the manner in which we make our investing decisions as a fiduciary to our clients. If, in the future, there comes a demand for such a strategy, then we will consider incorporating impact investing and the values behind it into our portfolios.
What is Impact Investing?
Impact Investing, often called ESG investing (standing for the environment, social, and governance) is on the rise. In fact, between 2017 and 2018 alone impact investing jumped 110% and a whopping 600% since 2009.[i] While the concept is not new, ESG companies and sustainable investing have been around for decades, the demand for ethical companies that meet the ESG standards is definitely on the rise. As of 2018, $46 billion worth of impact investments were under management and 91% of investors reported the financial returns to be at or above their expectations.[ii]
Who is an Impact Investor?
One of the main reasons for the demand in ESG investments comes with a changing investor profile. Millennials and women are more likely to seek out ESG, or ethical investments. 77% of affluent millennials have made impact investments versus only 30% of affluent baby boomers.[iii] As more millennials come of age, and more women handle their finances and overall wealth, the more we will see an uptick in ethical investing. The private wealth held by women has been on the rise and by 2020, women are expected to hold 32% of all privately held wealth.[iv] Women across the board practice more charitable giving and are more likely to pursue impact investing. This cultural shift is making major changes in the financial marketplace and how companies operate overall. Investors want more out of their portfolios than returns, they want to see active change and a match on values.
Positives of Impact Investing
Like anything, there are pros and cons to impact investing. One important positive is a feeling of using your investments to support your beliefs and values. The old ‘put your money where your mouth is’ saying made real. If you are passionate about the environment, for example, but invest in companies that are rampant polluters, your values and investments are misaligned. On the other hand, if you know your investments are only going to companies that meet ESG standards, you may feel like you are doing more to enact change, while also making a profit. On top of that, you can also feel good by not participating with companies you view to be irresponsible. Much like charitable giving, which activates the pleasure centers in our brain. The act of supporting companies that you feel improve the world feels good. Doing good feels good.
On top of feeling good, ESG companies have been doing well, with annualized returns at 5.46% which is slightly better than the S&P 500’s 5.43 percent over the same period.
Negatives of Impact Investing
Impact Investing may not give back the same financial returns. That being said, when surveyed, 67% of investors reported they would prioritize making an impact which is worth a slightly lower return on ROI (return on investment).[v]
Having to choose between profit and values. Diversifying is still very important, more so for an impact investor who has fewer options overall. It’s good to fill in the gaps using sustainably rated stock and mutual funds. On the plus side, long-term ESG strategies look to outperform traditional investments in ten years.[vi]
Not all ESG offerings are created equal, so it is advised to do the research on what is most important to you. There are many criteria for company ratings, so taking your time and doing your homework can help you find the investments that best match your values. https://business.nasdaq.com/esg-guide/list-of-sustainability-resources.html is a compiled list of organizations and research on sustainability companies. Finding a financial advisor with a specialty in impact investing could also help you navigate.
Another con is that not all social change can be solved through capitalism. Social change needs more than private business, even the most sustainable. Laws, regulations, and mass social attitude shifts also need to be factored in. Like investing itself, it’s a long-term game that takes patience and hope as much as planning. Impact investing companies may also be designed to put more money back into communities, or factor in less profit overall.
The Big Picture
If you become an ESG investor, a good rule is that success cannot always be measured in profit when dealing with social impact. You choose to invest based on your values because you want to contribute to bettering the world. You want your money to do two things in tandem: grow to support you and help to improve the business climate. ESG companies strive to be profitable while also being sustainable, supporting human rights and workers and operating in harmony with their overall communities, and the world. By making the statement, with your money, that you value companies that value more than profit, you can feel good about where your investments go. That may be worth a less than peak return in the short term. But like anything, that will be up to you and your values.