By Keith Beverly, CFA, CFP(R), MBA, Managing Partner and CIO, and Deborah Adeyanju, CFA, Associate Planner and Impact Strategist
Having been in the impact investing space for a while now, when we see headlines like this recent one in The New York Times, “Investing in Social Good Is Finally Becoming Profitable,” we are beyond frustrated. Not only does the article get several points wrong, its biggest error, one shared by many, is that there is a tradeoff between investing for impact and achieving competitive financial returns. There isn’t. Below, we discuss this point and others the Times piece gets wrong.
1. “Returns are enticing hesitant investors to rework their portfolios.”
Despite the article title’s implication that socially responsible and impact investing have only recently become profitable, the actual evidence shows otherwise. Studies of both public and private impact investments from consulting firm McKinsey, the Wharton business school, the Wall Street Journal, and others have found investing for impact compares well to traditional investing strategies.
In addition to those, a joint study from Global Impact Investing Network (GIIN) and Cambridge Associates found that impact investing returns are dependent on the choice of fund and the investment manager.1 Hmm, this sounds to us—and it is —no different than traditional investing strategies.
2. “Impact investing typically focuses on three categories: environmental, social and governance, known as E.S.G.”
Wrong. There is a relationship between ESG and investing for impact. Impact investing grew out of so-called socially responsible investing, which evolved into what is now called ESG investing. But impact investing takes the ideas and investing strategy a step further by not just favoring industries and companies that have high social responsibility scores or specifically considering those factors as part of one’s investment criteria and/or decisions. This distinction is important.
1. Source: GIIN and Cambridge Associates, “The Financial Performance of Real Assets Impact Investments,” 2017.
As GIIN describes it, impact investing is specifically intended to “generate positive, measurable social and environmental impact alongside a financial return.” Examples of impact investments could be infrastructure projects designed to benefit a specific community, an affordable housing development, or reforestation projects.
Another point of difference between ESG and impact investing strategies has been that as currently defined and practiced, the social component of ESG investing is narrowly defined. What do we mean by that? We mean it largely ignores race and diversity, equity, and inclusion (DEI) factors. We believe these are important risk/opportunity factors. That’s why a core element of our impact strategies at GRID is investing in firms that believe in equity and are rated more favorably by their employees of color.
3. “Impact investments are outperforming traditional bets in the coronavirus crisis”
Impact investments may be showing better results versus traditional investing strategies in what has been, to put it mildly, a year of unexpected developments. But no informed investor would project a longer term performance trend based on just six months.
On top of that, this short term trend may reflect several factors, including that energy stocks were the worst performers of the S&P 500 through the first six months of this year. (ESG and impact strategies tend not to invest in the energy sector except for renewables/clean tech). Additionally, the tech sector has performed very strongly this year. These market dynamics are not necessarily reflective of performance in a typical year.
4. “The coronavirus crisis may be a turning point for wealthy investors looking to generate change.”
This might be the author’s least informed statement of the entire piece. Impact investing is experiencing explosive growth, with broad support among all investor types — whether they are institutional investors to high net worth individuals and families as well as other individual investor types. According to a recent Morgan Stanley survey, “more individual investors seek products that target specific impact areas. Overall, 84% of respondents wanted the ability to tailor their investments to their values, up four percentage points from 2017, and rising to 90% among Millennials. ... our 2019 survey also found strong interest among investors for tracking the impact return on their investments.”
GIIN has tracked the growth of the category over the past decade. Its 2020 Annual Impact Investor Survey covers 294 investors managing $404 billion of assets. That’s up from the 2010 survey’s 61 investors managing $35 billion! Clearly, investors, including wealthy ones, have already voted with their ￼wallets. A comprehensive biennial study by US SIF Foundation found SRI assets grew 38% from $8.7 trillion in 2016 to $12.0 trillion in 2018, representing about 25% of total assets professionally managed in the United States.2
Bottom line, impact investing is no longer a fringe investing strategy. And the way newspapers of record and other influential sources communicate about it matters. We are committed to helping our investors profitably access this space and to equipping them with the facts.
GRID 202 Partners is a holistic financial planning firm specializing in fee-based, comprehensive financial and investment planning for individuals, couples, businesses and institutions. We serve successful, ambitious professionals and business owners ready to take the next step in developing a budget, reducing debt and creating wealth for themselves and future generations.
2. Source: US SIF: The Forum for Sustainable and Responsible Investment, “Report on US Sustainable, Responsible and Impact Investing Trends,” https://www.ussif.org/files/US%20SIF%20Trends%20Report%202018%20Release.pdf.