Have you heard about a movement in investing that is called values-based investing, impact investing, or socially responsible investing? These all refer to an investment approach that considers the environmental or social impact of a company’s actions, leaders, and products. According to the Global Impact Investing Network (GIIN), “impact investing is powered by investors who are determined to generate social and environmental impact as well as financial returns, and it is taking place all over the world across all asset classes.” Socially conscious investments are referred to as ESG, which stands for Environmental, Social, and Governance. And a growing number of research companies provide company ratings on ESG issues.
Once upon a time, the idea of investing with a conscience may have meant avoiding funds or stocks featuring tobacco, alcohol, and gun manufacturers. But today’s impact investors require a more in-depth understanding of a company’s actions and products before deciding to support through investment.
Impact investing has really come into the spotlight in the last decade, in part fueled by the availability of rapid information through media and the internet. Investors can understand in real time how a company’s actions affect the environment or a social situation from a negative event (a fuel spill) to a positive one (helping victims in the aftermath of a hurricane). Results of the second annual Edelman Trust Barometer Special Report: Institutional Investors showed that 89% of investors have changed their voting or engagement policy to be more attentive to ESG practices.
Another influence on impact investing is the changing investor profile—skewing both younger and more female. Many millennials find appeal in impact investing since they see giving back to society as a strong mandate. In a recent article, Paces Ferry Wealth Advisors stated that 77% of wealthy younger investors have engaged in impact investing (versus just 30% of older investors). Further, the company noted that women practice more charitable giving and are more likely to pursue impact investing—and they are expected to hold 32% of all privately held wealth by 2020. Increasingly, it seems that being socially conscious can make a company more appealing to investors.
Impact Investing Today
Impact investing has gained traction through both individual and institutional investors, and the GIIN estimates the current size of the global impact investing market to be $502 billion. And the International Monetary Fund estimates that there are now more than 1,500 equity funds with a sustainability slant. These funds control nearly $600 billion in assets, up from $200 billion in 2010. Overall ESG-listed funds still have much ground to cover, since they represent less than 2% of the total investment fund universe.
In the past, the assumption was that these types of investments would not be profitable to the investor (and be more of a “feel good” investment), but that’s no longer the case. The International Monetary Fund released a Global Financial Stability Report last month that found that the performance of “sustainable” funds is comparable to that of conventional equity funds. Seconding this notion is data from a Morningstar study that compared impact investing to traditional investing regarding mutual fund performance. The company found that impact-oriented funds haven’t “historically lagged traditional funds.” However, the report specified that this was true only if impact funds were diversified and fund managers focused on companies with sustainable growth tendencies.
Sectors most directly impacted by values-led investing include sustainable agriculture, renewable energy, conservation, microfinance and affordable basic services such as housing, healthcare, and education. While the bulk of this type of investing is conducted by institutional investors (such as a pension fund), it is growing within the individual investing community
Where to Begin
One way to start on the journey of impact investing is to review a company’s social impact statement—something that is becoming more commonplace. Of course, keep in mind these statements are part of a corporation’s publicity machine. It is the responsibility of the reader/investor to think critically and see all sides of a company’s actions. You could also consider established mutual funds (or ETFs) that put sustainability at the forefront of the investment strategy.
You can also find out a company’s ESG rating or metric, which evaluates the company on measures of environment (steward of nature), social (employee, customer, and community relationships), and governance (leadership, pay, etc.). There are a number of third-party companies that create these metrics. However, some of this information can be misleading. A recent article in Barron’s explained that oil and gas companies fare surprisingly well on some ESG ratings—because they are assessed on their transparency disclosure. The Washington Post recently noted that the ESG ratings industry is also much less regulated than the world of credit ratings, with no official standards and qualifications.
Here are some tips to help if you are considering creating your own impact investment strategy:
First, figure out how you want your investment to impact the world. For some this may be directly supporting clean energy. Another person might not avoid fossil fuel companies entirely, but support only those that strive to reduce their environmental impact. And yet another may want to support companies that value female leadership. It’s really up to you to choose which values will guide your investments.
Next, create a screening process to find the investments that align with your priorities. You can use company history, news from reliable media outlets, ESG metrics, etc. to identify the best matches for you.
Be Aware of Limitations
No one company will score high on all the areas of concern. For instance, one get top marks for environmental stewardship, but score low in employee profits and promotion. So take into account your research and priorities and make the best investment choice that feels right for you.