Investing Evolves

Is it possible for investors to develop portfolios offering competitive financial returns over the long term while also advancing social progress and the environment through those investments?

This question has engaged thoughtful investors for more than four decades as they have looked for strategies and standards by which to select and evaluate their investments. This question is also at the center of a new evolution in investing focused on the creation of measurable impacts through effective, directed investment.

While in various ways investors have long considered how to manage their wealth for impact, we might date the start of the current quest to the 1970s, when a growing number of universities, faith-based institutions, foundations, and others began to inquire whether they had responsibilities to correct “social injury” caused by the companies in which they invested as minority shareholders.

From these philosophical underpinnings, and aided by Securities and Exchange Commission regulatory changes, individual and institutional investors filed the first few dozens of shareholder resolutions raising questions about environmental and social responsibility at US publicly traded companies. Today, hundreds of shareholders file resolutions each year at US companies regarding environmental, social, and corporate governance (ESG) issues.

Several developments in the 1980s further galvanized responsible investing and broadened its range. The anti-apartheid campaign motivated endowments and other institutions to question whether they could push companies doing business in South Africa to work for democratic changes there. The environmental catastrophes at Chernobyl and Bhopal also drew investors’ attention to whether their portfolio companies had adequate policies to reduce and manage environmental risk.

Early interest in sustainable and responsible investing was not limited to publicly traded securities alone. Religious investors and those involved in the social transformations of the 1960s and 1970s also sought to use their investments to aid in community development in the United States and abroad. The Johnson Administration’s War on Poverty programs helped create community development corporations. The community-investing industry developed further in the mid-1990s with the formation of the US Treasury’s Community Development Financial Institution Fund, revisions to the Community Reinvestment Act of 1977, and creation of new tax incentives such as the New Markets Tax Credit Program that helped to usher new investing into low-income communities.

For 30 years, the assets committed to this type of investing—alternatively known as sustainable, socially responsible, or responsible investing—grew rapidly, extending across the entire range of asset classes, and spawned organizations such as The Forum for Sustainable and Responsible Investment (US SIF), the Interfaith Center on Corporate Responsibility, Ceres, the Council of Institutional Investors, and the Principles for Responsible Investment.

In the last decade, a new wave of investors specifically seeking measurable, direct impacts has emerged. They have sought out innovative alternative investment vehicles, such as private equity and loan funds, that have explicit missions to support goals such as economic development, sustainable agriculture, clean energy, transit-oriented development, quality education, fair trade, and access to health care. These investors began by seeking to draw the most direct line possible between their investment capital and community-level impact, and thus focused largely on private equity and debt. This approach represents billions of dollars of capital and has forged new networks such as the Global Impact Investing Network, Mission Investor Exchange, and the 100% Impact Network.

Sustainable investors and impact investors have, from time to time, sought to differentiate themselves from each other, yet, at the most basic level, we are cut of the same cloth, with complementary missions:

• Both seek to mobilize capital as a tool to improve our world.
• Both seek to impact the ESG performance of companies.
• Both seek financial returns—sometimes market-rate returns or below-market returns to achieve outsized environmental or social impact—or a range of financial returns across a total portfolio managed for environmental or social performance.
• Both have diverse strategies for integrating sustainable/impact investing into overall investment practices.
• Both are witnessing increased interest from an array of investors, including millennials, entrepreneurs, policymakers, foundations, and pension fund fiduciaries.

Perhaps the most important thing the two practices have in common is that investors who engage in impact investing more often than not also engage in sustainable investment, ensuring that they more fully utilize their portfolios to address environmental and social challenges. And sustainable investors are increasingly exploring how to increase their investing strategies to target measureable, community-level impact—an arena in which they have been active for many years.

Moving the Market

As this field has grown and evolved, conventional investors are beginning to understand that if they do not consider, address, and manage ESG or sustainability factors, then they assume unnecessary risk. And in an ever-competitive global capital market, they simply cannot afford to do so. For example, investors in a clothing retailer need to understand how that company manages supply chains and upholds labor rights, to protect their bottom line and ensure that employees are treated properly; likewise, they must consider the amount of water that cotton production requires and its level of environmental impact.

At the same time, today’s challenges also offer investment opportunities such as clean energy and sustainable agriculture, and a growing number of mainstream investors are recognizing that ignoring such opportunities “leaves value on the table.”

Finally, there is the burgeoning “change the way we do business” movement that considers societal and stakeholder interest in the development and execution of business practice. Networks such as Business Alliance for Local Living Economies, Social Venture Network, Social Enterprise Alliance, and B-Corp have so far driven this conversation.

Yet there are also mainstream business initiatives now promoting many of the ideas initially conceived within the sustainable and impact investing community. Shared value, for instance, proposes that companies maximize their total value creation potential by taking into account both social stakeholder and environmental considerations—and is a concept that appears to be gaining traction.

Shared value builds directly on the concept of blended value, first introduced in the sustainable/impact communities in 2000, which promoted the idea that value is whole and investments operate simultaneously in economic, social, and environmental realms. Within a blended value frame, there is no “trade off” between the three, but rather a concurrent pursuit of value creation. If mainstream corporate practice can lift up and take in our formerly out-of-the-box ideas regarding the very nature of value itself, the possibilities for continued market transformation loom large.

The Transformative Market

Today, sustainable, impact, and other aligned investors can harness our influence and talents to move more investors and assets toward sustainability and impact.

We need to ratchet up collaboration to educate practitioners new to this way of thinking and to assist the innovators who are trying to change the practices of their firms from the inside.

We need enhanced communication to ensure that all investors are aware that it is possible to make sound investments that generate environmental social and governance impacts, across all asset classes, in the United States and abroad. The evolution of investing must continue if we are to harness the potential of global financial markets to address the many challenges we face around the world.

So to return to our initial question: Is it possible for investors to develop portfolios offering competitive financial returns over the long term while also advancing social progress and the environment through those investments?

It is—and we urge you to join us!

Read more stories by Lisa Woll & Jed Emerson.