One area that has been growing very quickly is sustainable and impact investing. Historically, investing in a sustainable or impactful way has been difficult to achieve with any degree of confidence and, thus, has been limited to private investments. However, a variety of factors are making these types of investments increasingly available to investors in the public markets. Since we are often asked about the topic, we thought it would be good to start with the basic terminology and definitions.
Socially Responsible Investing (SRI): This term is generally used to describe the screening out of specific investments. For example, owning an S&P 500 index fund, but without “sin stocks,” such as companies involved in weapons, alcohol & tobacco, gambling, fossil fuels, etc. This is a great way to align your investments with your values, but it can be quite subjective. Boeing makes airplanes, but it also makes fighter jets and missiles. Some investors may be against investing in alcohol companies and some may not care.
Environmental, Social, & Governance (ESG): ESG investing generally means investing in companies that rank well in terms of environmental sustainability, social issues, and corporate governance. Not only are these positive attributes, but they can mitigate risks, as poor corporate governance or high environmental risks can lead to poor stock performance (think Enron or BP, for instance). In some cases, an ESG-driven approach will lead investors to taking active positions in firms with very poor ESG scores, with the goal of making improvements and capturing any resulting upside.
Impact Investing: The goal here is to make a positive impact with your portfolio, rather than trying to do no harm (SRI) or trying to be more responsible and sustainable (ESG). Examples of impact investing could include buying mortgages that finance low-income households, buying banks that focus on community development, investing in clean energy or startups focused on improving education or health. There is a very wide spectrum of opportunities here, but these are just a few examples.
Please let us know if you have questions on any of the above or would like more information on the types of opportunities that we currently see in the marketplace.