Updated September 2018 — At one time, contributing to a good cause meant writing a check to your favorite organization, but opportunities to make an impact have changed dramatically over the years. Many individuals now invest with specific objectives in mind, and many invest in a way that reflects their values.
“Social impact investing aims to align investors’ objectives with their personal values,” says Audrey Truman, Senior Vice President – Senior Regional Fiduciary Manager for Wells Fargo Philanthropic Services. “It is investing with an eye toward purpose alongside profit. For those with philanthropic desires, your money can have an effect on causes close to your heart—both when it’s in your investment portfolio and after it is distributed to institutions you care about.”
The practice of doubling down on philanthropic intent through impact investing can be powerful. According to a survey by the Global Impact Investing Network, 229 of the world’s leading impact investing organizations manage nearly $228 billion in impact assets in total, expanding the potential benefit of those dollars to social and environmental progress in addition to financial return.
“Social impact investing is integrating environmental, social, and corporate governance issues into the investment decision-making process,” adds Lloyd Kurtz, Head of Wells Fargo Social Impact Investing. “It’s a way for our clients to align their portfolios with what they care about.”
Here, Truman, Kurtz, and Kimberly Ryan, Senior Vice President – Portfolio Manager, Wells Fargo Social Impact Investing team, outline how investors may supplement their charitable efforts with social impact investing strategies.
1. Research social impacts
Investors have access to a sea of information about social impact investing on the internet. What’s more challenging: gaining an understanding of how companies are addressing these issues. Adding critical knowledge about the company’s performance, industry trends, and products, for example, is necessary to help narrow down the number of firms that would fit into a social impact investing portfolio.
“Let’s say you’re considering an investment in a medical technology company,” says Truman. “In addition to looking at common metrics, like product recall rate or quality or safety ratings, you may want to consider whether a particular company has strong programs to reduce energy waste and water usage, or whether it has a diverse set of leaders in its executive suite, or whether it has a program in place to improve access to health care in developing countries.”
2. Schedule a meeting
Individual investors, however, might struggle to integrate all of this information consistently, which is where a portfolio manager steps in to incorporate environmental, social, and governance (ESG) analysis into the decision-making process. “We look at issues we deem material to a company’s operations and industry,” says Ryan. “We analyze the company’s strategy around those issues and its performance. We then make a judgment as to whether this increases our conviction in the long-term sustainability of a company’s cash flows or adds risk to our investment thesis.”
Ryan says the goal is simple: “Ultimately, you try to own the kinds of companies that align with your values. In providing capital to these companies, you are helping good businesses to grow and, by extension, supporting better outcomes for society.”
3. Embrace the potential benefits
While contributions to a single nonprofit can be important and impactful on a local level, social impact investing can help you encourage positive change more globally. Prompting companies to adopt the values associated with social impact investing into their business practices may correlate to long-term shareholder value. According to a Leeds University study on viewing investing through a gender lens, having just one female director is associated with a 20 percent lower likelihood of firm bankruptcy. “It used to be that company management got the benefit of the doubt,” Ryan says. “Now we can influence management to do better and provide our clients with better risk management.”
4. Face the challenges
Many investors raise concerns about whether their portfolio returns would be negatively affected by impact investing. “All investing involves risk, and an investment’s social policy may mandate that it forgo exposure to certain industries, companies, sectors, or regions of the world, which could affect portfolio performance,” Truman says. Of course, past performance is no guarantee of future results.
But analysis over the years has indicated that including social responsibility (SR) screening as part of investment strategy generally has not had a negative impact on potential returns. Launched in 2016, the S&P Global 1200 ESG Factor Weighted Index uses a weighting scheme that accounts for the ESG factor score for each company in the S&P Global 1200. Historically, from March 2009 until August 2018, total returns for the S&P Global 1200 ESG Factor Weighted Index have been at par or above the S&P Global 1200.
“This perspective aligns with our own work through Wells Fargo Social Impact Investing. We’ve found that the social or sustainability parameters were not major performance drivers, positive or negative,” says Kurtz. “The real drivers of portfolio performance were the same as for any investment portfolio: How much risk are you taking? Is the portfolio well-diversified? Are there good risk management practices in place?”
5. Stay on track
New impact investing products are rapidly entering the market, keeping investors and knowledgeable professionals on their toes to seek a fully diversified portfolio with 100 percent alignment. The next evolution? Greater company transparency and the ability to track ESG performance by industry with metrics, says Ryan. “This is essential for social impact investing to go mainstream,” she says. “In the past, many investors have looked at how they make money as distinct from how they choose to spend it, including charitable giving. This has changed in recent years—philanthropy and social impact investing are compatible and complementary.”