What if your investments had the potential to do good in addition to the potential to provide financial returns?
More investors are demanding just that. For example, Lloyd Kurtz, Senior Portfolio Manager and Head of Social Impact Investing at Wells Fargo Private Bank, recently worked with a client who inherited significant wealth from her parents. She stressed to Kurtz that she wanted to use her inheritance to make a positive difference.
“She wanted investments that suitably aligned with her values,” Kurtz says. “She had a strong sustainability perspective and real concern about climate change.” This type of investing is known as impact investing or responsible investing, and Kurtz says it’s growing in popularity.
A 2017 Wells Fargo study of millennial investors found that 76% of those surveyed believed that socially responsible companies will have more success over the long term. Trillions of dollars of assets are following this trend. According to the Forum for Sustainable and Responsible Investment, sustainable, responsible, and impact investing assets in the United States grew to $12 trillion in 2018, up 38% from 2016.
Today, responsible investing can be highly individualized to align with the specific desires of the investor. Here, Kurtz and Kimberly Ryan, Senior Vice President – Portfolio Manager, Wells Fargo Social Impact Investing team, share the core actions investors can take through impact investing.
Results have been competitive
Kurtz says that people who haven’t investigated responsible investing might assume there’s a financial penalty for investing in a way that aligns with their values. But his team has found reasons to doubt that assumption.
“According to the S&P Global 1200 ESG Factor Weighted Index, performance of these strategies has been at par with or above the S&P Global 1200 from 2014 to 2019,” says Kurtz. “So while you can’t predict future performance based on historical results, our experience has been that social or sustainability parameters by themselves were not major performance drivers, positive or negative.”
The potential to earn competitive financial returns has helped drive responsible investing, Ryan believes. “The growth of this space has really been predicated on this theory: Through appropriate selection and diversification, we can pursue competitive performance while also seeking to achieve what you want from a values or impact perspective.”
Know your personal do’s and don’ts
This is the heart of aligning your investments to your personal beliefs: Along with defining the causes that matter the most to you that you want to support, you should also outline any specific areas you wish to avoid if they are against your personal beliefs.
Once investors are clear on their values, they can connect with a financial professional to craft a portfolio. If the decision involves other family members, Ryan points out that an advisor can help facilitate the conversation, which can be complex.
Explore and understand ESG measurements
More companies are reporting on their environmental, social, and governance (ESG) practices, particularly as large institutional investors and a growing number of investment managers ask for this information.
Environmental criteria include:
- How a company performs with regard to sustainability
- Greenhouse gas emissions
- Pollution control
Social practices relate to how it manages relationships with employees, suppliers, customers, and local communities. Governance involves business leadership, executive pay, audits, internal controls, and shareholder rights.
In 2018, Kurtz says, the independent Sustainability Accounting Standards Board (SASB) published 77 standards to help companies and investors assess ESG factors in a consistent way across industries and tie them to financial performance.
“When we assess the ESG performance of an asset,” Kurtz says, “we’re looking for improvement over time.”
Be willing to push for change
As shareholders of company stock, investors have the ability to push for changes in corporate practices.
“Some people would say it’s not possible to have impact with a stocks and bonds portfolio,” Kurtz says. “I take issue with that; I think you certainly can.”
Another way to push for change might include investing in microfinance ventures that provide small businesses in developing nations access to capital. “This is an example of putting your money to work,” Kurtz says, “not just to seek financial results, but results in the real world.”