Investors are aligning their money with their values.
10 years ago, even five years ago, conversations about impact investing would start with financial advisors asking clients, "Is this something you're interested in?"
Today, it’s the clients proactively asking how they can back companies committed to best practices for environmental impacts, social responsibility, and corporate governance issues.
Sustainable investing typically includes:
- ESG (Environmental, Social, Governance), an approach focused on investments
with lower operational or reputational risks
- SRI (Socially Responsible Investing) that excludes companies based on specific criteria
The growth of ESG and SRI funds has been exponential since 2018. Mainstream investors, pension funds, and retail investors have their share of impact investing because of societal shifts. People are looking for meaning and purpose in their money as a way to express meaning and purpose in their lives. And they want to understand the impact that their funds can have.
The Institutional Perspective
There is also an enormous institutional acceptance and push. 70% of institutional investors have implemented some ESG or SRI strategies, motivated in large part by the liability and financial aspect of climate change.
A 2019 BlackRock study showed that ESG portfolios can be more resilient at downturns. Executives need to analyze what climate action failure or natural disasters caused by extreme weather can mean to their businesses. It's another reason that good governance, resilient supply chains, and environmentally sustainable practices should be integrated into companies -- and then into investment portfolios.
Different Ways to Look at Performance
Across the C-suite and in the investment community, there's growing acknowledgment and data that material sustainability factors directly impact a company's financial operational performance.
Brand value, balance sheets, valuation factors, intellectual factors, employee satisfaction, and customer relations are all measurable now. It's been proven that companies with better ESG or SRI scores tend to receive higher valuation metrics.
To Avoid “Greenwashing” – Systems Can Measure Social Impact
In order to avoid greenwashing – the practice of making statements of policies that make an investment or fund appear to be more serious about ESG or SRI than it actually is – there are a lot of frameworks coming together to provide consistency of which metrics are reported, and how and when they are stated.
Previously, research for metrics of a company’s impact took a lot of time and results might not be verifiable. Today, if an advisor makes an investment based on lowering of the greenhouse gas per unit of revenue, they can find the information in a couple of clicks. Different data sources provide the data and companies are disclosing that data. Then the advisor can review metrics quarterly with the company to evaluate results.
Investing With Purpose Can Mean Investing for Profits and Less Risk Too
Many companies scoring highly in factors deemed important either environmentally, socially, or from a governance standpoint are showing better profitability. There was concern a while back that socially responsible investing meant giving up something. But after years of making these kinds of investments in private and public markets, in the bond market, and in stocks, we see improvement in profitability and in many instances, less risk.
Over the last few years as companies have adopted standards, they are improving their product profiles and getting higher multiples. When a business has high employee satisfaction scores, they have better retention and less need for legal liability, accruals, etc. A robust, clean supply network means smarter changes for environmental issues.
Impact Investing is Becoming More Mainstream
Indexes weighted for ESG and SRI are becoming more widespread, and almost every asset class has the opportunity for investments, including:
- Equities (stocks)
- Fixed income (bonds)
- Cash & cash equivalents
- Real estate
When you are looking for meaning and purpose in your life – and your money...
To add impact investments into an overall, well-diversified plan that is representative of the market, please contact us to see how we can help.
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