Lately it seems that everyone wants in on sustainable, responsible impact investing (SRI). Encapsulating a broad swath of investment styles, from environmental, social, and governance (ESG) screening to shareholder resolutions and community investing, SRI has become the darling of the social impact community.
In the U.S. alone, over one-fifth of professionally-managed funds (held by institutional investors, money managers, and community investment institutions), or a total of $8.7 trillion, consider ESG factors. This figure is up from $6.57 trillion in 2014 according to the U.S. Forum for Sustainable and Responsible Investment (USSIF)’s 2016 SRI Investing Trends Report. A much smaller proportion is in impact investments. According to the Global Impact Investing Network’s 2017 Annual Impact Investor Survey, which polls 209 institutional investors making impact investments, capital invested in impact investments rose by 17 percent last year from $22 billion to $26 billion.
While SRI growth trends are impressive, USSIF claims that the total potential market for professionally-managed assets in the U.S. could be as much as $40.3 trillion, an indication that there is still a great deal of room for SRI investing to grow. Three trends are especially encouraging: investing and a wider variety of investment vehicles are becoming more accessible to more people, community focused investments are one of the fastest-growing segments, and millennials are nudging investment managers toward SRI.
Expanding access through new investment vehicles: With the expansion of investors who offer SRI investments to include foundations, public funds, venture capital, community development financial institutions (CDFI), money managers and institutional investors, there has also been an increase in the types of investment products on offer. Individuals’ desire for greater control over their investments and variety of choice has resulted in a growing online investment platform landscape. Offerings such as OpenInvest and Swell are focused solely on impact investments, providing investors the choice of SRI products from exchange traded funds (ETFs), mutual funds, stocks, bonds, and index funds, and traditional platforms are beginning to offer their own impact investment products in order to compete. Many of these vehicles are open to individuals below the high net worth level.
Community impact investments are on the rise: It is an encouraging trend within SRI investing that community impact investments, which direct capital to underserved communities, are one of the fastest growing segments. (SRI investments held by institutional money managers is the other fast-growing category.) According to the USSIF, community investments by credit unions, CDFIs, and others doubled in just two years, from $64 billion in 2014 to $122 billion in 2016.
Community capital allows individuals and small business owners to appeal directly to potential funders for investment capital to pursue community-driven opportunities. Investibule, a B Corp that aggregates investment opportunities on a crowdfunding site, sees making these opportunities available for individual investors as a means to meet the growing interest in socially responsible investment while also plugging a funding gap for underserved communities and businesses.
One recent example is a partnership between the NAACP, YMCA, and Impact Shares (a nonprofit investment manager). In November 2017, the group announced the offering of two exchange traded funds (ETFs) in Chicago, one focused on investing in social justice and one focused on women. The Minority Empowerment ETF will invest in companies that empower minorities through their hiring and compensation practices, and the Women’s Empowerment ETF will invest in companies that promote the advancement of women and workplace equity.
Interest in sustainable investing is rising, especially among millennials: According to Morgan Stanley’s 2017 report, Sustainable Signals: New Data from the Individual Investor, 75 percent of individual investors are interested in pursuing investments that “aim to achieve market-rate financial returns while pursuing positive social and/or environmental impact.” This interest is even higher among millennials, with 86 percent interested in sustainable investing, and women, with 84 percent interested in sustainable investing – as compared to 67 percent of men. As millennials stand to inherit from aging baby boomer parents, more investment capital will be in their hands, and this transfer of wealth, given their interest in SRI, has the power to nudge more institutional investors into sustainable investing. For example, employers offering 401(k)s and other retirement savings plans will need to consider that, according to Morgan Stanley, 90 percent of millennials would be interested in choosing sustainable investment as part of their 401(k), if it was an option, as compared to 72 percent of the total individual investor population.
Yet, despite these favorable trends, two challenges slow the pace of its growth.
Continuing belief that impact comes at the expense of financial returns. A 2015 study by Deutsche Asset & Wealth Management and Hamburg University found that across 2000 empirical studies on ESG performance, 90 percent show a positive correlation between ESG and corporate financial performance. Yet many Americans still hold the perception that investing based on ESG impact comes at the expense of financial gain. Fifty-nine percent of millennials surveyed for Morgan Stanley’s report consider sustainable investing to involve a financial trade-off, and that makes funds hesitant to emphasize impact. The recent announcement of the Rise of the Rest Fund, a seed fund to invest in small businesses across the U.S. outside the pockets of NYC and Silicon Valley, was quick to point out that its purpose is financial performance not impact.
How to measure and what’s most important? Measuring the impact of SRI investments is tricky. A framework which measures investments in a way that fully captures social results alongside financial performance is still developing. Investors care about both market rate returns and impact, but with some types of investments and investors higher returns are not always the primary goal. A more nuanced system of measurement is required, based on the investors’ individual investment priorities, that also accommodates the diversity of investment offerings and definitions of what constitutes SRI (e.g., impact investment, shareholder resolution, or ESG screen).
What next? The SRI field is still evolving, yet the acceleration of investments into SRI and the increased interest by both individuals and institutional investors are encouraging. Hopefully, SRI investors will continue to listen to what investees are asking: provide more ways for individuals to invest in a variety of products and platforms; invest in women, minorities, small businesses and communities; and combat perception biases through more rigorous investment objectives and measurement.
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