During my twenty years in the investment management industry, I’ve seen a number of trends. One of the more exciting trends to emerge recently is a movement toward “impact investing.” In short, impact investing involves directing your investment dollars in ways that drive social change and thereby positively impact the world. But, what exactly does that mean and how does one pull it off? In this article, we’re going to look at a few of the more popular ways in which investors execute their impact investing goals and, hopefully, gain a few more impact investors along the way.
Let’s first take a brief look at the evolution of impact investing. Impact investing first emerged as an idea among certain large institutional investors (e.g., large non-profits and public pensions). These organizations began to look for ways to manage their endowments in ways that were consistent with their missions by considering environmental, social and governance (“ESG”) factors when choosing investments. For example, an environmental organization may seek to limit its exposure to companies that have a history of adverse environmental impacts. Or, certain religious-affiliated organizations may want to steer clear of certain “sin” stocks. A small industry emerged in an effort to help these investors make better choices. For example, consultants and data providers began to create ESG “scores” to help companies screen stocks and proxy-voting companies created “ESG” voting policies to facilitate more mission-driven proxy voting.
Unfortunately, in the early days, impact investing was not particularly popular as most people in the investing world simply wanted to maximize returns and believed that ESG factors were counter to that objective. However, as time went on it became more clear to industry participants that companies scoring well on ESG factors also tended to be companies that saw better operating results. In 2012, a study was published titled “The Impact of Sustainability on Organization Processes and Performance” (by Eccles, Ioannou & Serafeim) which looked at the performance of companies based on sustainability factors (e.g., how they treat employees, their consideration of broader societal impacts and resource efficiency). In summary, the report stated, “we provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term both in terms of stock-market and accounting performance”. This study and others helped to transform a boutique industry into a worldwide movement.
These days, investors of all shapes and sizes are looking to both make money AND have an impact with their investments. Perhaps the easiest way for individual investors to participate in this movement is to hire an investment adviser that provides an impact investing solution. An adviser can sit down with you as an investor and learn about what type of impact you are interested in achieving. By understanding your motivations and passions, the advisory firm can better customize a portfolio to ensure that your investments align with your values. The following is a sample of a few of the types of investment funds that are available:
If you’re not looking to go the advisor route, there are many tools for the individual investor to assist in aligning investments with values. The Global Reporting Initiative (globalreporting.org) is an excellent source for public company ESG information. The Forum for Sustainable and Responsible Investing (ussif.org) is a good source for content and provides a list of potential ESG-focused mutual funds. Moreover, ETF.com which contains extensive information on exchange-traded-funds (“ETFs”) currently lists 82 ETFs in this category with over $10B in assets. Good luck on your journey into impact investing. And remember, it’s a win-win – good for your portfolio and good for the world.