Changing the world one investment at a time

Investing in something you’re passionate about doesn’t have to be solely a philanthropic act. The practice of making good while doing good has become more widely recognized and easier to implement. It is a common misconception that socially responsible investing starts with an investment that then needs to be modified to ensure it falls in line with certain standards, when in fact this type of investing has evolved into starting with an idea of doing good and pairing it with an organization that will assist in that mission.

The landscape of opportunities has changed dramatically in the last decade and investors should be aware of certain considerations, namely three primary ways to socially responsibly invest, the need for diversification as well as the difficulty in remaining objective when it comes to selection.

There are two customary ways to approach socially responsible investing with Environmental, Social and Governance (ESG) in mind. A traditional elimination approach limits an investor’s exposure to certain industries, i.e. “sin stocks” that some investors might find morally questionable. This screening has expanded significantly in recent decades to include factors such as energy efficiency, gender diversity and political contributions. A second investment approach is to become a shareholder and then use actions to make positive change such as initiating a proxy vote to pressure executives and board members. The advocacy approach uses traditional channels to effect progressive changes.

It is with these concepts as a base that impact investing emerged as a third primary way to invest. This has truly become a movement as we’ve seen a growth of 40 percent or more in ownership of impact investing since 2014 among women, younger and ultra-high-net-worth individuals (Source: “2016 U.S. Trust Insights on Wealth and Worth”, U.S. Trust, 2016).

The idea of investing for good alongside a financial return is not new, but the way people highlight it certainly is. This growth can be attributed to several factors, but most often we hear that investors desire to make the world a better place. Individuals may have always felt a responsibility to give back, but they are now shifting their focus to the multiplier effect. By investing, rather than making charitable gifts, the same dollars can have profound value for years to come.

The avenues of socially responsible investing have not kept up with the proliferation of worldwide causes to support. The good news is that with more investors focusing on it, the pathways are expanding. There are traditional mutual funds and ETFs, we’ve seen bond issues with selective covenants gaining attention and private funds with direct hyper-local purposes are available.

This variety of investment channels allows for various levels of capital commitments, but diversification is not as widely available in these options as in many other investment types. We caution against constructing an entire investment portfolio based solely on ESG principles until proper diversification can be attained. Until then, ESG investments should complement current investments and market exposures.

When one is passionate about making a difference, it can be challenging to remain objective. While financial returns may not be the first priority, losing the money with little impact isn’t either. The further abroad and less developed the economy the investment is in, the higher the risk can be. One could contend the higher the impact, the greater the reward as well.

In fact, with this wave of interested capital moving to the smallest villages of the world, it does sometimes feel like we are all helping lift each other up. But be wary: if it sounds too good to be true, it probably is. There is an opportunity for advisors to assist their clients in this process, and determining viability and scope is only part of it.

Due diligence is necessary around such things as how the capital will be deployed, who the principals are, what the measurements of success will be and more. In-person meetings with the organization are crucial when going direct. Once that work has been done, it needs to be matched to the investor’s own set of constraints when providing capital, such as return, time horizon, liquidity and risk preferences. A gap exists between organizations that could use the capital and their ability to meet the constraints. With time, this gap should shrink. Until then, much work can be done to increase the visibility of available offerings.

The world of socially responsible investing certainly has a lot of energy as it evolves. Measuring portfolio success just on benchmark returns is a thing of the past. We look towards a future where analysis includes new ratios and calculations that align the investment goals with the desired level of impact. If you’ve ever been told that investment portfolios are for making returns and your philanthropic activities should be done outside of it, it’s time to think again.

Lynne C. Amerson is a Senior Portfolio Manager at Chasefield Capital, a Colorado-based multifamily office and wealth management firm. She can be reached at [email protected].