Why You Should Consider the Impact of “Impact Investing”
Why You Should Consider the Impact of “Impact Investing”
The term “Impact Investing” has many aliases. Each term is nuanced and describes a niche of ethical investing; however, at a broader level, all of them refer to connecting the dots between ethics and investments. Some of the terms used to describe these investment strategies include Socially Responsible Investing (SRI), Environmental, Social, and Governance (ESG), Thematic Investing, Impact Investing, Socially Conscious Investing, Socially Sustainable Investing, Faith-Based Investing and more. Some of these strategies exclude specific investments altogether. For example, strategies may restrict investments in alcohol or tobacco related businesses or exclude business who operate in Sudan.
Other ethical investment strategies use a scoring system to grade publicly traded companies on their environmental, social, and governance footprint to compare them against other companies within the same industry. The idea is that the highest scoring companies, based on predefined ethical factors, are screened and identified as more sustainable or viable investment options versus their peers. Thus, these strategies are not exclusionary in nature. Further, Faith-Based investing identifies investment opportunities closely aligned with religious principles, such as Catholic values.
The Popularity of Impact Investing is on the Rise
While the breadth of these strategies is wide, the objective they share centers around seeking positive investment returns while taking into consideration the long-term, sustainable impact that business practices have on society, the environment, and the performance of the business itself. More simply stated, these strategies incorporate non-economic themes, indicators, or factors in the investment decision-making process. For the past several decades, and rapidly picking up steam in the last few years, investors have thought more and more about aligning their morals and beliefs with their investment strategies. They are, so to speak, putting their money where their mouth is. Over the past three years alone, more than $20 billion of assets have moved into U.S. equity funds focused on managing an investment strategy in lockstep with investor ethics and principles. This wave of $20 billion represents more than a 25% increase in total assets under management in this category.
The backdrop for this rapid rise in popularity is related to the increased awareness and scrutiny of political, social, technological, corporate, and environmental happenings and missteps of the last couple decades. These events have occupied front page news and elicited strong reactions in the form of movements, groups, rallies, protests, public outcry, and action. Investors, too, have been paying attention to these issues. With an uptick in demand within the last three years alone, more than 100 socially-focused funds were launched. Investors now have a full suite of investment options for which to allocate their ethically-denominated funds; and, with the advent of index fund options, impact investing is lower-cost than ever before.
How to Make an Impact through Impact Investing
So, what difference does impact investing make? Arguably, the biggest impact you can make to a publicly traded company comes via ownership of equity (stocks) or debt (bonds). Ownership can be achieved through investing in socially-focused indexing, ETFs, Mutual Funds, underlying stock positions, and more. Not only does ownership allow an investor to express confidence in a company’s social, environmental, or corporate policies, but it also enables an investor to directly express their concerns in shareholder meetings and proxy voting.
With more awareness for social, environmental, corporate, and governance issues than ever before; and, with more ethically focused investment options available, investors have a unique opportunity to make an impact with their dollars and create a long-lasting, sustainable investment legacy. If impact investing is something that interests you, please book a time to chat with an advisor at Heck Capital.
Authored by Benjamin Opsal, CFA on April 26, 2018
About the Author: Benjamin Opsal, CFA is a Portfolio Management / Investment Analyst Senior Associate at Heck Capital Advisors. Benjamin earned the right to use the Chartered Financial Analyst® (CFA®) designation after completing the program in 2016, fulfilling the work experience requirements, and gaining acceptance as a member of the CFA Institute. The Chartered Financial Analyst® (CFA®) charter gives a strong understanding of advanced investment analysis and real-world portfolio management skills. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.