Investing with Purpose: ESG, SRI, Values Based, and Impact Investing

It all started with a few clients wanting to ensure their money was helping to fund more developments that combat fossil fuel consumption. Those few clients grew to many more clients who wanted their money to be invested in a manner that is aligned with their values and beliefs, to fund projects and companies where there is more than just profit to be made and there is a higher level of care to do good for the environment, society, and all stakeholders. Put simply, it is trying to do well for others as well as with oneself with your investment dollars.

I believe sustainable investing provides a renewed, more comprehensive standard for investing that can potentially provide better outcomes than traditional investing over the long term. Originally, this way of investing was referred to as Socially Responsible Investing and Impact Investing. Nowadays, Environmental, Social, Governance (ESG) screens are becoming a standard. While other regions of the world had already embraced ESG in investing, the US is now beginning to embrace these principles more and more.

We began incorporating ESG in our investment process in 2016, when we partnered with Calvert to invest in one specific area of the global stock market where we saw compelling evidence that incorporating ESG screens had helped improve investment results. A few years ago, we embarked on a research project to design ESG-focused portfolios where all investments are selected not only for their investment merit but also for their high standards in ESG—that is, to include and emphasize companies which have attractive investment return potential and embrace principles, values, and practices which help improve the environment, society, and all stakeholders the company touches (employees, customers, communities, etc), while, at the same time, excluding or minimizing companies that do not embrace such principles, regardless of profit or investment return potential.

Nowadays, there is a lot more information about ESG, SRI, Values Based and Impact Investing but still a lot of confusion remains. Here is a short description of what these concepts mean and how they are used:

• ESG: This stands for Environmental, Social, Governance. This is the most commonly used name for the movement to invest your money with purpose. Nowadays, there are many different ways to incorporate ESG screens in investing in both a passive manner (following an index with ESG quantitative-driven screens) or actively managed strategies (where both quantitative and qualitative screens are applied). Here is a definition of each of these initials to better understand what they mean:
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  Environmental: These are considerations around climate change, renewable energy, natural resources, pollution and waste management, and environmental opportunities.
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  Social: These are considerations around human capital, product liability, stakeholder opposition, and social opportunities.
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  Governance: These are considerations around corporate governance, diversity in the workplace, corporate behavior, and transparency.
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• SRI:  This stands for Socially Responsible Investing. This was the original name coined for a strategy that focuses on generating returns across both financial and social dimensions. Traditionally, these strategies focused primarily on the social and environmental impact of the investments that would be made. Nowadays, ESG is a more commonly used framework because it incorporates the "G or Governance" screen to the overall process.
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• Impact Investing: This is investing to make a positive impact. While one could argue that all ESG/SRI investing should have a positive impact, it is not always measurable or reported. When focusing on Impact Investing, investors focus on creating measurable positive impact with the investments made. This provides a more direct link between the investment made and the positive change that those dollars create. It also creates an additional burden on the investment strategy, projects, or company, to have clear and positive outcomes and not just use ESG as marketing spin (see green washing below).
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• Values Based Investing: This is investing based upon a value or belief system. This is the most challenging approach to investing with purpose because it focuses more on certain values or beliefs and trying to avoid or emphasize them. This approach may take into consideration religious beliefs or certain issues that may fall within any of the ESG pillars. Some examples of this may be animal welfare or child labor practices. This approach requires an actively managed process in selecting investments that truly respect the values important to the investor.

When considering all these principles, it is very important to consider how many investment companies are "greenwashing" their investment products to attract more investors. The concept of greenwashing is similar to "window dressing" in corporate finance and it happens when an organization tries to present itself as more environmentally or ESG friendly than they truly are (based upon the actual data) in an effort to obtain higher investment dollars from ESG investors. As the ESG investment space matures and more higher quality reporting standards become the norm, this issue may be reduced. Still, for committed ESG investors, it is important to look beyond the marketing labels of ESG and truly understand what they own and why. Being victim to greenwashing is one of the primary reasons we have taken a more active approach in researching all the ESG investment strategies within our client portfolios.

If aligning your investments with your values and principles resonates with you, we welcome having a conversation about how we can help you maximize your return as well as your impact.