Can you imagine your investments not only reaping financial returns, but also supporting societal change? Welcome to social impact investing, a trend that’s gaining momentum as investors realize that profit and impact are not mutually exclusive.
“Investors now are asking, ‘How can I do well in my investments and do good for others and the environment,’ says Tom Lillard, First Vice President at Merrill Lynch. In Lillard’s case, he analyzes and vets fund managers to ensure they are meeting environmental, social and governance standards (ESG) without sacrificing returns. The laws of supply and demand will then take hold: more money flows to socially conscious companies, spurring social benefits across the globe.
The financial industry has taken note of the increasing demand for investments that meet ESG criteria including issues related to workplace safety and hiring practices; climate change and energy use; and corporate political contributions and diversity on boards.
In fact, the Forum for Sustainable and Responsible Investment (US SIF), a membership association composed of professionals, firms, institutions and organizations engaged in socially responsible and sustainable investing (SRI), reports that $1 in every $6 under professional management in the U.S. is now aligned with SRI investing strategies. That’s up from 1-in-9 dollars in 2012. Furthermore, assets and numbers of funds incorporating ESG criteria have jumped to $4.31 trillion in 2014 from $1.01 trillion in 2012.
SRI shouldn’t be confused with philanthropy, suggests Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing. Instead, investors should take their best practices in traditional investing and make them more thoughtful.
“Sustainable investing does not require a financial tradeoff,” Choi says. “You can absolutely do this while still applying all the principals of quality investing. Over time, it’s our real belief that sustainable investing should become a redundant term.”
The numbers are compelling. Morgan Stanley analyzed the performance of more than 10,000 equity mutual funds and found that sustainable equity funds met or exceeded median returns of traditional equity funds during 64 percent of the time periods examined.
Millennials have shown a particular interest in SRI, says Marguerite Griffin, national director of philanthropic services at Northern Trust.
“The old idea that our job is just to make money is not sustainable,” Griffin says. “How people think about risk is dynamic and changing. Clients are now looking at their lifetime and their children’s lifetime and asking, ‘How is this going to affect the environment, ’ which is fueling much of the demand for SRI products.”
Some points to consider for anyone interested in SRI:
1. Apply the same rigor to the process of sustainable investing as you would with traditional investing.
2. Seek out professional advice from someone (i.e. a financial manager) who has vetted the ESG criteria of funds.
3. Take time to think about your goals for social impact, and express them to your financial advisor. For example, are you particularly interested in issues of energy use and impact on the environment?
4. Don’t confuse philanthropy with your investment strategy. You should still reap profits from your investments.
5. Start small. Most financial advisors encourage portfolio diversity and your SRI strategy should follow the same guidelines.
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