We invest money to make money – that’s a simple fact.
The primary goal of Sustainable, Responsible, Impact investing is to earn market returns, but for some investors, their non-financial goals may also be very important. Can SRI investments meet both goals and remain a viable and competitive option in the marketplace today?
During the last 30 years, the investment industry has seen a boom in the use of SRI strategies, so much so that it’s now become part of global, mainstream investing. Demand for SRI is on the rise as more and more people realize the power they have when aligning their dollars with an organization’s intent. In the U.S., there’s now more than $12 trillion invested in SRI strategies – or about 25 percent of total assets under management in the U.S.1
Source: “Report on US Sustainable, Responsible and Impact Investing Trends”, US|SIF Foundation, 2018
This interest has multiplied the options available. Unlike 25 years ago, today’s investors may choose from hundreds of SRI mutual funds and exchange-traded funds (ETFs). Nearly all equity asset classes are represented with all U.S. capitalization sizes – i.e., small-cap, mid-cap, large-cap stocks – plus international and emerging markets. Offerings within fixed income securities represent a growing area of SRI investing, allowing investors to finance projects that reduce the environmental impact of industry.
There is a clear demand for SRI, but how do its investments perform when it comes to meeting the primary goal of earning returns? A growing body of academic research suggests that choosing SRI investments has not had a negative impact on investment performance. A 2016 review of academic studies conducted by the independent researcher Morningstar found that sustainable funds and indexes perform on par with conventional funds.2 The Morgan Stanley Institute for Sustainable Investing found that sustainable funds provide both financial performance and lower downside risk.3
Median Total Returns of Sustainable and Traditional Funds, 2004 to 2018
Source: “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds,” Morgan Stanley Institute for Sustainable Investing, 2019.
If SRI investments have performed just as well as non-SRI investments, that begs the question, how well has SRI met its non-financial goals? Can your investment choices really make a difference?
They can when done en masse. Again, the financial industry has seen a significant influx of money going into SRI investments with 38 percent growth since 2016.4 This demand is driven in part by millennials – individuals reaching young adulthood in the early 21st century. Women are also big supporters of SRI, which is significant given they now hold more than half the personal wealth in all the U.S., as of 2015 a total of $14 trillion, and this amount is expected to grow to an estimated $22 trillion by 2020.5
These two emerging investor groups – millennials and women – could soon control upwards of $30 trillion in assets.6 Imagine the change that could happen if we decided collectively to only invest in companies that were good stewards of the earth, upheld gender equality, and treated their employees and communities well. Companies that don’t follow fair and sustainable practices could lose out on more than half the population of investors, and their stock prices could drop. Investors should not underestimate their power.
Negative screening is perhaps the easiest strategy to understand: your values are represented by what you choose not to invest in. Negative screening is the exclusion of sectors or companies involved in activities or industries deemed unacceptable or controversial. Your impact is felt by the dollars you withhold. For example, you might exclude all companies that manufacture, distribute, and sell sporting firearms, weapons, and guns.
ESG investing is a philosophy and methodology. It emphasizes environmental, social, and governance as the main criteria for gauging the sustainability of an investment. It does this by explicitly including the following ESG data into investment decisions:
These non-financial factors are considered alongside the goals of avoiding undesirable behaviors or reducing portfolio risk.
Positive or theme investing is the opposite of negative investing in that investments are selected that specifically relate to what is deemed positive or sustainable. For example, you might invest your dollars only in companies that utilize renewable energy, producing no greenhouse gas emissions from fossil fuels. Companies that endorse the CERES Principles (Coalition for Environmentally Responsible Economies) have formalized their dedication to environmental awareness and actively commit to an ongoing process of continuous improvement and systematic public reporting.
Another component of this strategy is to employ gender lens investing. A gender lens incorporates gender-based considerations to accomplish the goals of improved returns, reduced risk, and the promotion of gender equality. It typically means using your capital intentionally to benefit the advancement of women or girls. For example, you might choose to invest in loan programs that support women entrepreneurs in developing countries, or you might want to invest in companies that are working hard on gender equality and have more than one woman on the board and have equal representation in senior management.
Shareholder Advocacy or Activist investing focuses on the rights of shareholders to bring about change to a company’s policies and operations. As a shareholder, you become eligible to vote by proxy. Shareholder resolutions and proxy voting are tools used by some funds to influence a company’s decisions to take action on certain issues. Meaning, if large numbers of like-minded individuals purchase shares and/or obtain seats on the company’s board, then change can happen.
Although making an impact is certainly the goal by definition of SRI, impact investing has a specific focus. It invests globally in companies whose services or products target specific problems or challenges to generate positive, measurable impact alongside a financial return. Global examples of impact investing include the provision of credit services, education, and healthcare to poor women in small, developing countries. It can also mean the development of bilingual communities in the United States.
Can that be done without sacrificing performance? Over 90% of respondents of the 2019 GIIN investor survey on impact investing reported portfolio performance in line with or exceeding both their impact and their financial expectations.7 In general, impact investing places more emphasis on the achievement of positive impact than on earning a market rate of return.
Performance Relative to Expectations:
Source: “Annual Impact Investor Survey,” Global Impact Investing Network, 2019
Sometimes called faith-based investing (FBI) or faith-based funds, this strategy is generally considered to be the origin of SRI investing. You might think of it as a form of negative investing that screens out companies that engage in activities that are not consistent with a set of religious beliefs. It is also like positive investing in that it includes firms whose activities do not violate the tenets of a given religion.
