Impact investing in the age of President Trump

If implemented, the president's policies could have a profound effect on issues that resonate with a growing number of investors: the environment, social issues and corporate governance.

Mar 5, 2017 @ 12:01 am

By John Waggoner

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It's too soon to tell what effect the election of Donald J. Trump to the presidency will have on impact investing. But if implemented, Mr. Trump's policies could have a profound effect on issues near and dear to a growing number of investors: the environment, social issues and corporate governance.

The best-case scenario for impact investors is that impact investing will, over the long term, become a normal part of investment criteria and will produce change for the better, no matter who occupies the White House. The worst-case scenario: They find themselves standing against the herd on the Street — something that rarely works out well, at least in the short term.

So far, there has been no big post-election movement of assets in or out of funds intended to generate a measurable, beneficial social or environmental impact alongside a financial return. While investors yanked $127 billion from open-ended, actively managed stock funds last year, they added $3 billion to funds with some type of sustainable, responsible or impact mandate, according to Morningstar Inc.

Assets in socially responsible investing, which include assets tied to an impact mandate, hit $8.7 trillion in 2016. That's up more than 183% since 2010, according to US SIF, The Forum for Sustainable and Responsible Investment, a Washington, D.C., association of socially responsible investment professionals.

Wait-and-see mode

Professional money managers are still waiting to see what comes from the new administration. "It's too early to call for a change in investment policy," said Mamadou Abou-Sarr, global head of ESG investing at Northern Trust, which has $53 billion managed to ESG criteria. "But we were getting a lot of questions from investors before the election."

Many advisers are also in a wait-and-see mode.

(More: Dodd-Frank reform may be put on back burner)

Lincoln Pain, a certified financial planner at First Affirmative Financial Network, which specializes in ESG investing, said he's noticed a slight drop-off in assets from new investors since the election. "People are terrified for the immediate future of the market," Mr. Pain said. "I'm not sure that worry is historically accurate: It usually takes at least two years to ruin the economy, no matter which party is in power."

And large changes, even if you are ideologically opposed to them, can also spell opportunities. "Republicans typically prefer private enterprise solutions to problems. If they are going to gut the Environmental Protection Agency, then environmental cleanup agencies that are not dependent on government funding could be good investments," Mr. Pain said.

In other words, despite the stark idealogical differences between the Obama and Trump administrations, impact investors may still find solid investing opportunities in the years ahead.

So what exactly is impact investing? Impact investors focus on companies that have a positive impact on the world, rather than simply avoiding those that cause harm, such as polluters or those with repeated problems of mistreating employees. "The objective of impact investing is narrower than traditional environmental, social and governance investing," said Jeb Doggett, a director with Casey Quirk, a practice of Deloitte Consulting. "The agenda is to drive social change, be proactive and influence participants." Impact investors, for example, would be more likely to talk to companies about their practices and use their proxy votes as a carrot — or stick.

(More: Why investors may be overlooking the benefits of impact investing)

Of course, those companies also have to generate a decent return for investors. They did just that in 2016. The MSCI USA ESG index gained 11.7% last year, vs. 11.6% for MSCI's USA index. And the social investment funds that gained the most in assets last year were the Parnassus funds — which, not coincidentally, beat the S&P 500 by nearly two percentage points in 2016.

In theory, the election of Mr. Trump should spur more impact investing, because his administration's policies touch upon many issues important to impact investors. Mr. Trump has already approved the Keystone XL and Dakota Access pipelines, for example.

Paris agreement

And then there's the question of whether the U.S. will withdraw from the 2016 Paris Agreement on climate change. The aim of the convention is to avoid a global temperature change of two degrees or more this century. The agreement would require financial contributions from the signatories — currently 132 nations — as well as regular updates on progress to reduce emissions. Countries can agree on their own path toward reducing emissions.

Mr. Trump threatened to cancel the Paris agreement during the election. He could withdraw from the agreement or, as the George W. Bush administration did with the Kyoto Protocols, simply stop enforcing it. Impact investors will watch companies carefully to see if they relax their policies on carbon emissions and other factors that affect climate change, Mr. Doggett said. "President Trump is a galvanizing figure. To the extent he's talking about there being no global warming, it will get investors to align their investments to their core values."

That said, some impact investors do invest in more traditional energy companies, either because a company's environmental record is better than its peers' performance, or because it is seeking new ways to limit environmental damage. "We try to highlight good companies — we don't see a one-size-fits-all approach," said Amy O'Brien, Nuveen's head of responsible investment. They can also invest in so-called green bonds, where the proceeds go directly to support renewable power or cleaning up polluted sites known as brownfields.

And the marketplace seems to have smacked aside some clean energy investments in favor of their more polluting cousins. VanEck Vectors Coal ETF (KOL), for example, is up 7% year to date through Feb. 22, while First Trust Global Wind Energy ETF (FAN) has gained 4.2% and Guggenheim Solar ETF (TAN) has gained 4.4%.

Similarly, it's difficult to find impact investment opportunities in emerging markets, where corporate transparency, governance and employee relations can be far different than those in the developed world. "In public markets, there's a dearth of products that focus on emerging markets," said Jeff Finkleman, research associate for impact investments at Athena Capital. "The big impediment there is data: It's not as good and the reporting isn't as consistent as it is in the developed world."

So far, many of the actions that would worry impact investors have yet to take shape. For example, Mr. Trump signed an executive order in January ordering Treasury Secretary Steve Mnuchin to review the Dodd-Frank regulations, giving him 120 days to respond. While Republicans are no friends of the Consumer Financial Protection Bureau, they have yet to pass legislation that would dismantle it. "It's early days to see what is going to happen," Ms. O'Brien said.

For most impact investors, the focus is on the long-term effects of their methods and principles, rather than short-term political news. "It's important to note that a lot of strategies are to put the spotlight on companies doing well, with strong business ethics," Ms. O'Brien said. "That's stronger than just boycotting bad companies."

Fixed income

Impact investing has spread to the fixed-income market as well. Investment managers have discovered that companies with poor ESG practices might have additional risk. "If you're dumping something into the river behind the factory, eventually you're going to have to pay to clean it up," said Tim Coffin, director of sustainability at Breckinridge Capital Advisors.

Even municipal bonds have an ESG component. "Businesses are moving to areas where people want to live," Mr. Coffin said. Those areas typically have rising ESG ratings, meaning they also have a higher likelihood of maintaining or improving their credit ratings.

The great hope of impact investors, however, is that their investment principles become the norm throughout the investment community. "If you look at what has been happening in Northern Europe, where impact investment is more mainstream, you'll see that there is social pressure on companies to work and behave in a certain way," Mr. Doggett said.

That pressure should continue in the U.S. as larger companies start entering the field. Eaton Vance recently purchased , one of the oldest social investment fund groups. rolled out its Impact division in 2015. "It's a sign of things to come," Mr. Finkleman said.

Successful changes

Some of that social pressure is already succeeding. Calvert, which voted 44% of its proxies against management last year, has had significant sucess with some of its shareholder resolutions. Thanks to Calvert-supported shareholder resolutions last year, Dean Foods and Fresh Del Monte committed to issuing reports on water risk and water-risk management in their operations and supply chains. Panera Bread will assess employee benefits and compensation and then report back to shareholders. HealthSouth and Liberty Media committed to prepare a report which, in each case, specifically addresses workplace issues and safety performance.

"We think process is a right we all have as investors," said Anthony Eames, director of responsible investment strategy at Eaton Vance. "It's really a duty to use your voice as an investor to put pressure on companies to improve."

In the age of President Trump, investor pressure may help to offset relaxed governmental regulations on the nation's companies and industries.

(A previous version of this story incorrectly cited the MSCI ACWI Sustainable Impact Index instead of the MSCI USA ESG Index.)

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