Investing for Social Change

What does your money do while you're sleeping? Millennials, more than any other generation in history, want a meaningful answer to that question. Impact investing, investing for both financial and social/environmental returns, has caught the attention of the next generation of inheritors. At the Nexus Global Youth Summit last month, hosted at the United Nations Headquarters in New York, Millennial wealthholders and social entrepreneurs gathered to explore how to put wealth and ideas to work to catalyze social change. I was honored to participate again this year (you can read about last year's Summit here). This year I was able to dive deeper into the impact investing track of the Summit.

The idea of investing with intention has been around for hundreds of years, but the field has recently reached a tipping point. In 2012, one in nine dollars under professional management in the U.S. was invested using ESG criteria (ESG refers to the environmental, social, and corporate governance characteristics of a company). By 2014, the ratio had risen to one in six.¹ Along with this mainstreaming of sustainable investing comes an enlivened debate about what it is and how to do it. The panels at Nexus all circled around the same questions that I have heard at other events pertaining to ESG investment. What do we know about the financial returns of ESG investing? How do we measure our impact? And what is going on with the divestment movement?

Ongoing research supports the idea that returns on ESG portfolios can be competitive with those of traditionally invested portfolios. In fact, some studies suggest that ESG overlays can improve performance relative to traditionally invested funds. Of course, performance is never guaranteed, but the fear that ESG investing automatically equates to lower returns is unfounded. The argument against ESG investing has hinged on the idea that you would lower your financial returns by shrinking your investable universe. But here is another way to think of it: If you could shrink your investable universe to only those companies that are likely to do better financially, wouldn't you? Screening companies for ESG factors doesn't just help us sleep better at night; it may also uncover financial risks and opportunities that are not captured by traditional financial analysis. Calvert Investments recently published a comprehensive report analyzing three different ESG approaches over a fourteen year period (the full report can be accessed here). Their results suggest that historically, incorporating ESG factors into investment decisions has enhanced returns. Other studies suggest that financial returns are positively impacted by employee satisfaction and environmental efficiency, both of which are considered in ESG analysis. Despite this strong correlation, Nexus panelists warned against holding ESG portfolios to a higher standard than traditionally invested portfolios. ESG portfolios are subject to the same market forces as traditional portfolios; again, performance is never guaranteed.

Another hot topic in ESG investing is the question of how to measure your social or environmental impact. This is more directly applicable to true "impact investing," in which the investor's dollars go to a specific social or environmental program. In the public equity space, ESG investors seek to influence corporate behavior by directing investor dollars toward companies that perform well or are steadily improving in their environmental, social and corporate governance characteristics. This kind of strategy does not easily lend itself to conventional metrics. Ultimately, Nexus panelists agreed that the theory of change is more important than concrete metrics. In other words, an impact fund may provide data on how many schools were built or how many women received training; equally important, however, is how the project or investment approach fits into a deeper strategy for social change.

Lastly, Nexus participants discussed the question of divestment versus engagement. The fundamental question is whether it makes more sense to divest from companies whose business practices you disagree with or to own their shares so that you can influence them as a stockholder. The biggest divestment movement currently underway focuses on fossil fuels. Many universities, foundations, and religious institutions have divested their sizeable endowments from fossil fuels,²and many companies are offering low-carbon or fossil-fuel-free portfolios. Panelists pointed out that the strategy of engaging with companies to effect change, as opposed to divesting entirely, does not have a good track record. It often takes a long time to effect marginal, if any, change. Divestment, on the other hand, has proven effective in the past; it was a primary driver of the end of South African apartheid in the mid-90s. Divestment alone is unlikely to change the business practices of an entire industry, but it is one tool in a large and varied toolbox.

These questions of returns, metrics, and divestment versus engagement will no doubt be debated for many years to come. They are shaping the modern approach to sustainable and responsible investing. Although these discussions are often initiated by foundations, non-profits, financial professionals, and family offices, the most important voice is that of each individual investor. Each investor has the right to be heard and to design their portfolios in alignment with their beliefs. Are you engaged in ESG investing? What are your priorities? What approaches appeal to you? We'd love to learn more about how you view ESG investing, and we welcome your questions and comments. Give us your feedback by calling me at 301-864-1489 or send me an email at Jessica.higgins@RaymondJames.com.

¹ http://www.ussif.org/Files/Publications/SIF_Trends_14.F.ES.pdf

² http://gofossilfree.org/commitments/

Environmental, social and governance (ESG) refers to the three main areas of concern that have developed as central factors in measuring the sustainability and ethical impact of an investment in a company or business. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making investment decisions, and is not a recommendation or a solicitation to buy or sell a security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

Investing involves risk and you may incur a profit or loss regardless of the strategy selected.  Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria.  Investors should consult their investment professional prior to making an investment decision.