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Introduction to Impact Investing: History, Strategies, and Trends

By Lauren P. Long, CFP®, Director, Bronfman Rothschild Wealth Advisors

When it comes to modern investing, individuals have a multitude of options to choose from and a myriad of ways to implement their desired investments. As part of those options, the rise of impact investing has created some fundamental changes in how investors view their asset portfolios. Assessments of a corporation’s performance on environmental, social, and governance (ESG) criteria have made it easier than ever for investors to align their personal values with their investment portfolios, and many have chosen to do so.

Impact investing started as a means for organizations to avoid those areas that directly conflict with their values; for example, Quakers avoided investments that would have funded slavery and war. The first mutual fund that shunned certain “sin stocks,” avoiding stocks such as alcohol, gambling, and tobacco, arrived 90 years ago. The proliferation of impact investments has continued, and today, there are $22.89 trillion in ESG assets being managed professionally around the world, a testament to how popular the idea of impact investing has become. And its popularity continues to grow.

How do you Implement Impact Investing?

Impact investing today comes in many forms – each portfolio can be tailored to reflect the values of the investor and their specific social and financial goals. For starters, investments can be tailored to provide impact in a number of categories:

  • Negative Screening: Commonly referred to as “Socially Responsible Investing”, or SRI, this method excludes companies that conflict with an investor’s personal values or a foundation’s charitable mission. For example, in the 1960s and increasingly through the 1980s, institutional investors withdrew investments in South African companies that did not treat all employees equally in an integrated environment, eventually divesting of companies that had operations in South Africa.
  • Positive Screening & Shareholder Engagement: This method includes companies in your portfolio that directly align with your values or a foundation’s charitable mission. Investors can also utilize their right to vote by proxies, or by co-filing/filing corporate proposals.
  • Integration of ESG: ESG refers to a strategy that uses environmental, social/ethical, and governance factors across all asset classes and investments. For example, this can include investments in companies that have adopted progressive policies across areas such as environmental practices, board governance, diversity and hiring practices, supporting underserved communities, etc.
  • Themes & Direct Investments: Typically only available in private investment (private equity, private debt, etc.), these investments invest with a theme in mind (Environment, Financial Inclusion, Conscious Consumerism etc.) and are often illiquid. They can be global in nature, or can invest directly into a company.
  • Geographic Investments: These methods of investing can target specific geographic areas, most commonly local communities or underserved areas around the world.

Performance, Risk, and Impact Investing

When impact investing was initially introduced, choosing to invest all or a part of your portfolio in a category above was seen as an unnecessary financial risk to the return of your portfolio. Why would you deliberately choose investments that you know are going to provide a below-market return? However, the myth that impact investing funds deliver below-market returns has largely been debunked.

A 2015 report by the US SIF Foundation found that “the business case for ESG investing is empirically very well founded. Roughly 90 percent of studies find a nonnegative ESG-CFP (corporate financial performance) relation.”

In 2017, The GIIN Annual Impact Investor Survey found that while some investors “intentionally invest for below-market rate returns, in line with their strategic objectives,” a full two-thirds (66%) of investors indicated that they “pursue competitive, market-rate returns.” Of all those investors surveyed by GIIN, 76% said that their investment was financially performing “in line” with expectations and 15% said their investment was “outperforming” expectations. All of this is to say that impact investing should no longer be viewed as a financial hindrance to a portfolio. A United Nations Programme Finance Initiative even went as far as to say that “failing to consider long-term investment value drivers, which include environmental, social, and governance issues, in investment practice is a failure of fiduciary duty.”

An MSCI study into ESG integration and performance causation vs. correlation demonstrated that incorporating ESG factors into a portfolio allowed for outperformance and less risk.

Impact Investing Trends Today

I am personally encouraged that the democratization of impact investing has shifted from an investment option of privilege to one where all investors are demanding access. Investment products now exist in all liquid areas of an investment portfolio, not just in private equity and private debt. However, just because there is now an abundance of impact investment options does not mean they are all good options; the “greenwashing” of investment funds has required investors to be more diligent in choosing indexes dedicated to impact in practice, not just as a marketing tool.

Large foundation and university endowments have pioneered a lot of the divest/invest movements (for issues such as anti-Apartheid, or fossil fuel free) and also have big results in terms of shareholder engagement. For instance, in 2017, Exxonmobil shareholders demanded that the company work towards reporting on progress towards reducing dependence on fossil fuels, and those demands were met.

Millennials and women comprise a sizeable part of the demand for greater impact investing options as well as access to them; this is likely to continue as access to impact options broadens. In fact, as impact investing as an industry has gradually become more mainstream, women and millennials continue to rise as proponents and demanders of impact investing. According to research published by Morgan Stanley, 86% of millennials and 85% of women report being interested in sustainable/impact investments.

With many having entered the workforce during the Great Recession, many studies show that the average millennial is not as well off as their parents were at the same age. However, the millennial generation is beginning to enter its peak-earning capacity, and is poised to inherit trillions of dollars from their Baby Boomer parents in the coming decades, in what will be the largest intergenerational wealth transfer ever. Deloitte estimates that by 2020, Millennials may control up to $24 trillion in assets. With those statistics, it’s no wonder that impact investing is estimated to reach $400 billion by the same year. Common characteristics of the Millennial ethos – a skepticism of large financial institutions and a belief that they can change the world – makes impact investing a natural avenue for enacting their financial and social goals at the same time.

What Can I do to Get Started with Impact Investing?

For investors interested in introducing impact investing screens to your portfolio, you can begin by crafting an impact thesis from the start (with the assistance of a financial planner, if necessary). By outlining your social and financial goals at the beginning of the financial process, you will be more intentioned in evaluating the firms, indexes, and funds that are truly doing work that you can support and invest in. Going through the process of crafting an impact thesis will also help you evaluate your own motivations for impact investing in the first place.

There are also groups who have done tremendous work in evaluating impact investments and have compiled them into databases for all to access:

With a better understanding of your goals and motivations, finding companies and funds that match your values will be made easier.

Bronfman E.L. Rothschild, LP is a registered investment advisor (dba Bronfman Rothschild and Bronfman Rothschild Wealth Advisors). Securities, when offered, are offered through an affiliate, Bronfman E.L. Rothschild Capital, LLC (dba BELR Capital, LLC), member FINRA/SIPC.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. 
© 2018 Bronfman Rothschild