One of the more exciting investment trends to emerge recently is a movement toward “impact investing.” It involves directing your investment dollars in ways that drive social change and positively impact the world. But, what exactly does that mean, and how does one pull it off?
Let’s first take a brief look at the evolution of impact investing. The idea first emerged among certain large institutional investors (e.g., large non-profits and public pensions). These organizations began to look for ways to manage their endowments 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. 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. Most people in the investing world simply wanted to maximize returns and believed that ESG factors were counter to that objective. But as time went on, it became more clear that companies scoring well on ESG factors also tended to be companies that saw better operating results. A 2012 study titled “The Impact of Sustainability on Organization Processes and Performance” (by Eccles, Ioannou & Serafeim) 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). Their 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 transform a boutique industry into a worldwide movement.
Investors of all shapes and sizes are looking to both make money and have an impact with their investments. Perhaps the easiest way for an individual to participate in this movement is to hire an investment adviser who provides an impact investing solution. An adviser can sit down with you and learn what type of impact you are interested in achieving.
Understanding your motivations and passions, the advisory firm can customize a portfolio that ensures that your investments align with your values. Here’s a sample of the types of investment funds that are available:
- Emphasis on companies that have a lower carbon output relative to industry norms
- Emphasis on companies that demonstrate greater gender diversity within senior leadership
- Emphasis on investments in companies developing renewable energy solutions
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 for the world.