For many contemporary investors, portfolio construction goes beyond diversification and asset allocation. At the beginning of 2018, more than a quarter of professionally managed portfolios in the U.S. used socially responsible, sustainable, or impact investing strategies, accounting for $12 trillion in assets overall, according to the Forum for Sustainable and Responsible Investment (also known as US SIF). To the surprise of many, this growing trend is not limited to the millennial demographic, extending across all age groups as more investors seek to align their portfolios with their values.
What is all the excitement about? Here are the three models that generally define the social investment movement:
Socially Responsible Investing
Introduced in the early 1970s, this model of investment was based on screening out or excluding problematic companies from portfolios. Companies were excluded based on their involvement in negatively viewed topics such as weapons, alcohol, tobacco, gambling, fossil fuel production, and so on.
Introduced in the early 2000s, the focus shifted from the exclusion of offending companies from portfolios to the inclusion of companies based on positive screens. These screens are known as ESG screens, which stands for environment, social justice and corporate governance. Positive ESG company profiles can emphasize environmental sustainability, human rights, consumer protections, and diversity, among other issues.
In 2007, the term impact investing emerged. Impact investing refers to investing in companies that are developing solutions to global sustainability challenges. These challenges include climate change, sustainable agriculture, renewable energy, access to education, affordable housing, and improved health care, among other topics. The impact investing platform also recognizes companies that promote women’s leadership and gender equality, and companies that support community investing, including microfinance services. Notably, these companies also engage in shareholder advocacy and solicit public engagement.
Investors today have more investment choices than ever before, and the dynamic social investment realm is compelling. Investors truly can make a difference by tilting their portfolios toward companies prioritizing the triple-bottom line of people, planet and profit. And the profit component should not be underestimated – since US SIF began tracking the data in 1995, social investments have had a compound annual growth rate of 13.6%. This should prove once and for all that there doesn’t have to be a compromise on returns compared to conventional investments, and depending on the benchmarks, the social investments may even outperform.
For sources, see Bloomberg News.