Socially Responsible Impact Investing - A Fad, Smart, or Just Crazy?

FEBRUARY 09, 2016
H. William Wolfson, DC, MS, MPASSM, CFP
INvesting, personal finance, socially responsible investingRecently shopping for a pen in an office supply store, I was met with many options, including the choice of purchasing a pen that was inexpensive and suited my needs or buying a similar pen that would donate a few dollars to a social cause. Similar opportunities exist when buying a pair of shoes, clothing, and almost anything you can think of – buy the item and another like item or value will be donated to needy individuals or a cause. However, with anything that may be considered good there all too often exists a counterpart. Companies or individuals hoping for a positive outcome soon realize the intended results are less than hoped for or may even make a bad situation worse.
 
This phenomenon of pairing purchasing with social impact is called social purchasing. Indications are it is becoming entrenched in the millennial population and showing signs of expanding outward to other age groups. Accordingly, millennials are also looking to social media as they make purchasing decisions. “The younger the audience, the higher the chance of it acting on [social media] recommendations …Between 16 and 19 years of age, 84 percent have acted on recommendations, and between 20 and 24 – 81 percent.” Has this thinking translated over to socially driven investing and what does it all mean?
 
Socially Conscientious Investing (SCI) and Sub-Categories

Depending on whom you speak with or what research you find, the concept of socially conscientious investing encompasses sub-categories which each have their own nuances. Socially Responsible Investing (SRI); Impact Investing; Environmental, Social Governance (ESG) investing; and others seem to be the prominent types.
  
Socially Responsible Investing (SRI)
 
In essence, factors included in SRI are: Investors participating with companies (including governments) that align with investor values, i.e., job creation, diversity, gender equality, human rights, etc. Shareholders actively participating and keeping companies accountable to honor the SRI mantra and acting in an appropriate, value growth, and financially prudent manner. Ensuring capital invested is allocated to groups or areas in need of access and reduced interest loans. According to Michael Chamberlain, “The SRI approach is to invest in stocks and bonds from those companies and counties or municipalities that promote certain actions or eschew those, which participate in offending actions”

Impact Investing
 
The term “Impact Investing” was coined in 2007, but the idea dates back to the 1990s, when it was known as philanthropy or social cause investing. Over time the terms changed to explain how people wanted to invest in social and economic causes to help and benefit others, protect the environment, and be good world citizens for generations to come. At the same time, these investors expect to reap a profit for their investment, although not necessarily with the financial yield expected of other non-impact investments. Early on avenues to participate in impact investing did not exist or were limited, but over time as the movement grew so did the availability of impact investment opportunities.
 
Judith Rodin and Margot Brandenburg, authors of “The Power of Impact Investing” explain what this investing is, the realistic expectations of participating, and bottom-line social and economic returns. Impact investing is incredibly diverse and includes, “microfinance, affordable housing development, conservation and renewable energy finance, and social impact bonds… it varies by asset class, the investor’s risk tolerance and expectation of return, sector and geographical scope.” Impact (social) enterprises are at the core of this investing by combining passion and vision. Checks and balances must exist in order to have the ability to accurately measure “the social and environmental performance of their investments, but also enable impact enterprises to measure and improve their operations and services.” The free sharing of both good and bad investment results will allow us to improve impact investing models going forward. Impact investing has far-reaching global social and economic potential “where it can play a critical role in the continent’s continued economic and social development.”
 
The eventual success and growth of impact investing will depend in large part on governmental regulation, tax structures, legislation and other supports. If impact investing is allowed to keep its core mantra for social improvement and economic growth, “aspirational estimates suggest that impact investments could one day represent 1% of professionally managed global assets, channeling up to hundreds of billions of dollars towards solutions that can address some of our biggest problems, from poor health to climate change.”
 
Environmental, Social Governance Investing (ESG)
               
ESG is a term used in capital markets by those who wish to evaluate corporate behavior and determine the future financial performance of companies. ESG factors include sustainable, ethical, and corporate governance issues such as managing the company’s carbon footprint and ensuring there are systems in place to ensure accountability. “ESG describes the performance of investment and fund portfolios on environmental, social, and governance criteria and the quality of their performance against measurable ESG factors that are reported to shareholders.”
 
Economically Targeted Investments (ETI)
 
This term was coined by the Department of Labor under ERISA guidelines for 401(k) investments. The advent of social conscientious investing in 1994 prompted the Labor Department to promulgate regulations for these types of investments when used with 401(k) investing. In 2008, the department reaffirmed its interest in the issue, writing, “ETIs are incompatible with ERISA's fiduciary obligations.” However, in October 2015 the Department of Labor expanded their definition of allowable ETI use in 401(k) access. Ingrid Dyott managing director at Neuberger Berman stated, “About 15% to 20% of 401(k) plans today offer investments that provide a social return as well as financial results.”

The requirement is that ETIs are compatible with similar qualified investments which meet ERISA guidelines for investing within a 401(k). “As a general matter, the Department believes that fiduciaries responsible for investing plan assets should maintain records sufficient to demonstrate compliance with ERISA's fiduciary provisions”
 
Financial Planning Opportunities, Advisors, and You
 
The availability of active and passive socially conscience investments is allowing investors to expand their financial planning options and at the same time pick and choose those investments meeting their personal preferences and social consciousness. “Younger investors – millennials under the age of 35 – are leading the way in the demand for impact investing investments. More than any other age group, they are interested in investing in companies that share similar values and are more likely to believe they can achieve competitive returns (59 percent).”
 
Those interested in socially conscious investments should consult with a Certified Financial Planner who is knowledgeable and responsive to these types of investment opportunities. “Many impact investments can be used in a market-based portfolio without a significant increase in risk, and can serve to lower overall portfolio volatility and aid in the risk adjusted profile of portfolios.” It is important to understand that the returns on these investments may not always match returns with similar but non-socially conscious investments. Nevertheless this trade-off for some investors may be worth it.

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