Impact Investing – A Global Phenomenon

Jen headshot brown&green 6-2014.jpgYou may be sipping a glass of wine as you’re reading this. In fact, it’s probably why, like most investors, you don’t really care if the companies behind your investing produce alcohol – even if it is addictive, features ads that target the poor, and can lead to fatal car accidents or physical abuse.

But what about companies that produce cigarettes, weapons and gambling?
Socially responsible investing, or SRI, as it was once known, is now gaining major traction thanks in part to one small twist: a change in vocabulary that emerged from the UK. “It’s has been a more galvanizing force for more sophisticated institutional investors – like the state of California’s CalPERS that makes purchases of certain investments for a greener state,” says Amy Domini, founder of the Domini Funds and one of the nation’s chief architects of SRI.
From the days in 1986 when pension funds globally moved to oppose apartheid in South Africa by divesting of some $200 billion in companies that supported the move, impact investing as a real strategy has now caught fire with traditional wealth management firms. Indeed, those firms – from large banks and fund companies to boutique investment firms catering to the high net worth — are getting into the game with teams dedicated to addressing the environment, women and more.
The enthusiasm has not only led to more financial institutions producing investment products with a social tilt, but to a new focus on academics with seminars, professors and even programs churning out graduates who hope to pin their careers on the movement.

Performance Improvements
Another driver: A change in perception that an investor had to “give up” investment returns by doing good.
The question of whether an investor will sacrifice returns by doing good “is a question that will always be asked, “ says Domini, even though the facts have changed. When she started the Domini 400 in 1989 to track socially responsible companies, performance lagged the S&P. But now, it’s outperformed by a statistically significant difference: Since 1990, the social index (MSCI KLD 400) returned an average annual total return of 10.46% compared to the S&P 500’s 9.93%.
“When you do the kind of in-depth research that we do, you learn about a company, its management,” says Domini. “And, you end up with a golden fleece for investment advisors.”

How so and how can investors take note?
Consider a company with six product safety recalls in just a couple years, or community controversies that can result in substantial legal and reputational costs. Or an international company where business takes place one way: through bribery.
“When it comes to picking stocks, these to me are relevant issues and pretty cut and dry,” she says. “Do you really want to be investing in these things?”
While strategies may vary, Domini’s involves avoiding certain companies altogether, such as those involved in alcohol, tobacco, gambling, and weapons. The firm also conducts bottoms-up research. Take Colgate and Church & Dwight: the two appear quite similar, in that they both make cleaning agents. However one analyst scored Church and Dwight lower than Colgate in his “level 1” (or what does the company make) research. Upon closer review, Domini says the firm should score higher because it makes products out of baking soda, which are environmentally better than phosphates.

New Measures Bolster the Move
Adding momentum to impact investing is the creation of the Sustainable Accounting Standards Board (SASB), which is starting to create key performance metrics, and features top leaders from Michael Bloomberg to former SEC Chair Mary Shapiro.
“The mandate for greater disclosure has been cropping up,” Domini points out. “Creating standards and metrics that could grow into global standards just as we’ve seen in other areas like accounting, that can really change the game.”
Finally, the next generation. College students I spoke to were eager to get in the game. “I want to have a career in impact investing,” one young woman told me.
Who knows: maybe she’ll follow in Domini’s footsteps.

Jennifer Openshaw is a nationally known financial leader, columnist for Dow Jones’ MarketWatch, and author of The Socially Savvy Advisor. She’s advised Fortune 500 companies, including Microsoft, and has appeared on Oprah, Dr. Phil, CNN and Fox. @jopenshaw

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