Impact investing

Impact investing and ESG and what they mean for financial advisers

Impact investing and what it means for financial advisers

Impact investing and what it means for financial advisers

Investing with a purpose

By Matt Ackermann — September 11, 2018

Over the course of the past 20 years, impact investing has grown from a cottage industry to a $9 trillion movement. Your clients are clamoring for it, investment companies are pushing it, but what is impact investing and why is it so essential?

“Impact Investing is using your investments both to achieve financial return and broader societal or environmental impact,” said Jon Hale, the global head of sustainability research at Morningstar Inc. “I think that you can and should seek to be impactful throughout your portfolio, not just in sort of high-impact kind of investments, but in your public equities and fixed-income investments as well.”

Impact: Investing with a purpose

The clients expressing the greatest interest in impact investing are millennials—
the generation set to inherit trillions of dollars in wealth from boomers over the next three decades. In an InvestmentNews survey of advisers, millennials were the only demographic for whom more than 25% of advisers rated client interest as either “very interested” or “extremely interested” in impact investing.

“It's actually not so interesting to talk about PE multiples, ROI's, ROA's for the typical person in our society,” said John Streur, president and CEO of Calvert Research & Management. “However, if you can talk about the concept that a company has transitioned from dirty fuel to renewable energy and has completely eliminated its greenhouse gas emissions … that's really interesting.”

Over the past two decades, impact investing has gone by many names including socially responsible investing, value-based investing, ethical investing and, most recently, ESG (environmental, social and corporate governance) investing. But within this alphabet soup exists a simple premise: the practice of integrating social and environmental factors to avoid investing in companies that have a negative impact on the environment and/or society, and focus instead on investing in companies or funds that intend to make a positive impact alongside financial return.

InvestmentNews, wanted to explore impact investing to investigate the real impact it has on communities and the environment.

If you really want to understand why impact investing is critical, look no further than Wilmington, N.C., where a successful serial entrepreneur has launched a brewery that only hires active gang member in an effort to combat violence.

“We were having a gang-related shooting every week, very common,” said George Taylor of TRU Colors Brewing. “We've had two gang-related shootings in this city. So it's gone from 52 to two in a year, which obviously is quite strong.”

Mr. Taylor and other entrepreneurs, like David Katz of Plastic Bank, are being driven to create change worldwide. One of the biggest accelerators of impact investing has been the United Nations. In 2015, the UN introduced 17 sustainable development goals as a “universal call to action” to end poverty, protect the planet and ensure that all people enjoy peace and prosperity globally.

The Sustainable Development Goals (SDGs) provide an architecture for investors to have a more significant impact with their investments. “What's so interesting about The Sustainable Development Goals is they're not owned just by governments; they're not owned by a select few people; they're actually owned by all of us,” said Judith Karl, the executive secretary of the United Nations Capital Development Fund. “They are a universal agenda; they are measurable, and they have this great attribute of being both very concrete because we have targets, but also being extremely ambitious and integrated.”

In Haiti, we can see the SDGs, and impact investing, in action with The Plastic Bank. The company, founded by Mr. Katz in 2015, is working to reduce poverty and end ocean waste. It addresses 14 of the 17 SDGs. Plastic Bank is driving recycling efforts in third world countries on four continents and helping people like Mirielle, a single mother who lives in the rumble of downtown Port-au-Prince, Haiti – a nation still recovering from a 2010 earthquake.

“The hope in the mission of the Plastic Bank is to monetize materials,” he said. “Create a platform for the world to use and exchange all materials; plastic in particular, as a sense of currency.” As the popularity of impact investing grows, can these products have more sustainability and less volatility in down markets as investors align their investments with their value. “Impact investing actually has a couple of advantages for investors as investors,” Mr. Hale said. “One is that it could make their investments more sticky for them in times of market downturns. The reason is because there is something more to the investment than just financial return. If somebody has and attaches this broader purpose to their investment, I think they are less likely to want to jettison it the next time the market goes down.”

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