Impact Investing — What It Is and How to Do It
You — Yes You! — Can Serve Up Change with Your Investment Choices
By Kylelane Purcell, President of Purcell Communications
Do you want to have a voice in the way companies do things? Support companies whose values fit yours? Make your contribution to a better world?
Also, do you want to make money?
For a lot of investors, these aims have historically seemed to be in conflict. But that perception is changing. In fact, studies show that investing for positive change is a good way to make more money over time. It turns out that firms that are mindful of environmental and social concerns and practice good governance — the E, S, and G of what is known as ESG investing — are good long-term investments, on average.
But making these investments? Well there’s the rub. Impact investing is rife with complex terminology, wildly varying risks, and even greenwashing — that is, claiming to “benefit the world” without any real substance to back it up. But there is a path to be forged through the wilderness, if you know what you’re looking for. And there are many more opportunities than you may have heard of.
How Do You Make an Impact?
You could spend all day learning about the many detailed, complex approaches to ESG investing and still not really know what ESG investing means. If you’re the sort that likes clear, well defined data to help you make your decisions, you’re out of luck there too. While there is a lot of data being generated and reported about “impact”, there are no well defined standards (yet), so the data tends to be all over the place.
In some ways, however, this is good news. Because the best way to change the world through investing is to describe what you mean by changing the world. Start there, and your options become clear very quickly.
What Sounds Like You?
There are essentially three ways to be an ESG investor:
1) The Generalists. Many investors are in this camp, even the ones that don’t think much about “values” or “impact”. For the most part, we all want and expect companies to be good citizens, just as we want our friends and neighbors to be. ESG investors in this category want to know that someone is paying attention to corporate decisions that violate laws or cause harm to others, even if it doesn’t immediately hurt the company’s bottom line.
2) The Cause Champions. Many early adopters of ESG investing have done it because they care a lot about something specific. The list of possibilities here is extensive; some of the most common are climate change, racial or gender equality, and support of local communities. (If you want a more comprehensive list, the go-to resource is the United Nations’ Sustainable Development Goals.) If your goal is to put your finger on the scale of an issue you care about, you fit in this category.
3) The Power Users. If you’re not interested in half measures, but want to make direct investments in organizations and know exactly how your investments are changing things, this is the home for you.
What to Look For
There is a set of investments that are most suitable for each impact investing “type.” Note that these lists are not comprehensive, but they can help you consider what questions to ask about any investment you make and evaluate if they are a fit for you.
But be aware — many of these opportunities behave differently than your typical mutual fund and have different risk and return characteristics. It’s a good idea to talk to a financial advisor who is knowledgeable about ESG investing to see how they fit in your portfolio.
Category 1 — The Generalists
The best place to dip your toe into the ESG investing pool are “ESG integrated” mutual funds and ETFs (exchange traded funds). You can tell them because they often have Sustainable, Social, Impact, or ESG in their name.
>Approach #1: Actively managed ESG funds integrate broad ESG (otherwise known as non-financial) analysis into more standard investment approaches. In fact, because the risks of bad corporate behavior are becoming so well known, even many traditional investment strategies are doing at least some kind of ESG screening now.
Examples: AIG ESG Dividend Fund, Domini Impact Equity Fund, Trillium ESG Global Equity Fund, Parnassus Endeavor Fund, Vanguard Global ESG Select Stock Fund
>Approach #2: ESG Index funds and most ETFs are structured a little differently. They select (or create) an index of companies they believe meet certain ESG criteria, and then use the fund or ETF to track that index.
Examples: Fidelity US Sustainability Index Fund, Green Century MSCI International Index Fund, iShares MSCI USA ESG Select ETF, Nuveen ESG Small Cap ETF
Which type is better? Index funds and ETFs are usually cheaper, while actively managed mutual funds put more resources into gathering and analyzing non-financial data. Before you make your decision, be sure to ask the fund or ETF provider for their annual impact or sustainability report. Trust your gut here — if it doesn’t make sense to you, steer clear.
Category 2 — The Cause Champions
For these investors, it makes sense to look at funds that focus deeply on a particular ESG theme. While many funds take a very broad approach to investing for environmental, social, and governance outcomes, these “thematic” investments put much more thought and research into achieving specific goals — sometimes by investing in certain types of companies, other times by excluding them. You can usually tell them because the theme is prominently displayed in the name.
>Approach #1: Actively managed thematic fund companies often have a vested interest in their given theme, or they may partner up with other organizations to promote the specific impacts they want to have.
Examples: AB Sustainable Global Thematic Fund, Glenmede Women in Leadership US Equity Portfolio, Fidelity Water Sustainability Fund
>Approach #2: Thematic Index funds and ETFs typically select an index of companies they believe meet certain thematic criteria, and then use the fund or ETF to track that index. But some ETFs remain actively managed. Thematic ETFs in particular have become popular ways for emerging ESG investment companies to make a name for themselves.
Examples: Adasina Social Justice All Cap Global ETF, Calvert Global Energy Solutions, Change Finance US Large-Cap Fossil Fuel Free ETF, NACP from Impact Shares, Engine №1 Transform 500 ETF (ticker: VOTE)
The typical thematic ETF can be expected to have similar risk and return potential as a comparable equity mutual fund but be aware: the more innovative and impactful the theme or the companies in the portfolio, the more likely that the risks are going up.
Category 3: The Power Users
Investments that directly create change can be hard to find for the average investor. Most true impact investments revolve around particular projects — like setting up a solar farm or improving clean water access in a particular emerging market location — and are only available to large institutional investors or highly wealthy individuals. For everyone else, the options are limited.
(Side note: That doesn’t reflect supply, or demand — there are many investors interested in investing for change, and no shortage of organizations that are looking for funding. Instead, the challenge is regulatory. Investments that are open to everyday investors are subject to extensive rules, involving paperwork and costs, which are difficult for emerging impact investing organizations to meet.)
But there are some creative financial professionals out there that are trying to fill this gap. Several organizations pool up investor money to loan to community groups, nonprofit projects, and other impact organizations. Perhaps the best known of these is Calvert Impact Capital, although you can find similar products from Capital Impact Partners, Self-Help Credit Union and CNote.
Another option is CDFIs. CDFIs are community development financial institutions, and they are designed to provide funding for initiatives in their local communities. In fact, they are often recipients of the kinds of loans firms like Calvert Impact Capital and CNote manage. If you want to learn more about them, the place to start is the Opportunity Finance Network. There you’ll be able to find out which CDFIs may be working in your local community and how to contact them.
Don’t Go It Alone
The most reliable truth about ESG investing is that it is evolving, and fairly quickly. Every day brings new products to choose from and new data to use in evaluating the impact your investments have.
The good news is, quality ESG funds and ETFs are doing the heavy lifting for you — if you know what to look for. They are monitoring company actions, considering advances in data and analysis tools, and updating their strategies to reflect new developments.
But the bad news is, it’s not always easy to tell which companies are doing a quality job. That’s why we recommend that you don’t go it alone. Connecting with a knowledgeable ESG advisor, or joining an ESG investment club, can help ensure that you are choosing the right kind of investments to reflect what you care most about. And it will help you to confidently say, “my investments have an impact.”
