The COVID-19 pandemic brought about a host of changes, new realities, and concerns for everyone. As the world continues its search for a vaccine and a path forward, many people are taking baby steps to embrace the new normal, heal from the loss of loved ones, and reflect on how they can bring about positive change.
For many, the current situation has served as a “call to action” to help others and make a difference. Some help through personal efforts and donations, while others give their resources to public and private organizations focused on achieving a better and more sustainable future for all. For years, public and private enterprises worldwide have banded together to find ways to address the biggest challenges we face as a society – including climate change, diversity, environmental impacts, and poverty.
For investors who hope to effect change by supporting specific organizations, two acronyms should be kept in mind:
- SRI (Socially Responsible Investing)
- ESG (Environmental/Social/Governance)
Socially Responsible Investing (SRI) focuses less on where an individual wishes to invest and more on where they do not wish to invest. With an SRI approach, investors choose which industries to avoid, like tobacco or firearms.
ESG investing, on the other hand, is primarily focused on measuring organizations’ operations in three specific areas:
- Environmental (i.e., conservation of the natural world)
- Social (i.e., consideration of people & relationships)
- Governance (i.e., the way the company is run)1
ESG and impact investing (discussed below) are both guided by the UN’s Sustainable Development Goals (SDGs), a blueprint of 17 interconnected goals designed to achieve a better and more sustainable future for all.2
While ESG uses the UN’s SDGs to measure an organization’s operations, impact investing often goes a step further. Impact investing places an explicit focus on organizations whose missions align with UN SDGs to generate a measurable social or environmental impact alongside financial returns.3
Though there is no set definition of impact investing, it can be understood as a way to broaden the scope of potential investment opportunities to include organizations that may fit into one or more ESG and/or SRI categories.
The Future of Impact Investing
In a 2018 study, US-based investors said they expected ESG issues to affect equity and fixed income segments more in 2022 than in 2017.4 Another 2018 study published by Harvard University stated, “As of February 2018, approximately 40% of the G250, the world’s largest 250 companies, acknowledge the SDGs in their corporate reporting and include the global goals in their CEO and/or Chair’s message.”5
One highly publicized ESG investing example is Wells Fargo: investors shied away from the bank after it was revealed in 2016 that they were overcharging clients and creating fraudulent accounts — a reflection of poor governance. As a result, its share price underperformed peers in the preceding months.6
Since the scandal, Wells Fargo has redoubled its commitment to ESG considerations, and in 2019 the bank was named among the “most transparent” organizations on ESG issues.7 This is another important benefit of ESG and impact investing: focusing on the key factors of ESG investing can work to “de-risk” corporations by helping them avoid the headline risk often associated with governance, environmental, or social issues.
Is ESG, SRI, or Impact Investing Right for You?
One of the silver linings from COVID-19 is investors are placing more emphasis on investments that go beyond providing returns and have a positive effect on the world. ESG issues are becoming a larger part of the discussion for investors, boards, and rating agencies.
While impact investing can take many forms, general research guidelines are still being formalized. We can work with you and your family to assist in evaluating how an impact investment program may complement your goals and objectives.
If you are interested in ESG, SRI, or impact investing, please reach out to us to review your options.
1. CFA Institute, ESG Investing and Analysis
2. United Nations, The 17 Goals
3. The Case Foundation, A Short Guide to Impact Investing
4. CFA Institute, ESG Integration in the Americas: Markets, Practices, and Data
5. Harvard Law School Forum on Corporate Governance, UN Sustainable Development Goals—Leading the ESG Framework for Large Companies
6. Forbes, When Might You See ESG Issues Align With Stock Performance?
7. Wells Fargo, Wells Fargo Among ‘Most Transparent’ on Environmental, Social, and Governance Issues