Invest with a conscience and still achieve returns
IMPACT INVESTORS WANT THEIR INVESTMENTS TO ALIGN WITH A MORE RIGOROUS STANDARD
Gone are the simple days when investing with a conscience meant excluding alcohol, tobacco and firearms from a portfolio. Today’s impact investors want their investments to align with a more rigorous standard of good while achieving a maximum return.
Jean Case, chief executive of the Case Foundation, is a leader in impact investing, a movement that aims to force social change by minimising or eliminating investors’ exposure to companies that harm the world and achieve a solid return.
Yet Case, an early signer of the Giving Pledge, a commitment by high-net worth individuals to give at least half their net worth to charity, said she struggled to fill just one of her portfolios with diversified impact investments.
“I haven’t found across-theboard, great impact opportunities,” said Case, who created the foundation with her husband, Steve Case, the co-founder of AOL.
If Case, with her resources and deep network in the impact-investing world, laboured to fully align one of her portfolios, what chance does an ordinary affluent investor have?
Although great progress has been made with mutual funds, exchange-traded funds and private investment opportunities, the short answer is, it can be hard for any investor, particularly for those who hew to an exacting standard.
But that challenge has seemingly increased interest in impact investing, which can be difficult to achieve if a solid return is the goal. It is also hard to measure, given the differing definitions of impact investing.
Do your homework
Case said she started trying to move one portfolio to full impact investments about 2 1/2 years ago. “I created a portfolio and let the wealth advisers run it while I was out talking about impact investing,” Case said. After one of her quarterly meetings, she said she realised she was invested in companies that did not match her criteria.
So she created a screening process to find only the impact investments she wanted, like companies with diverse boards solving 21st-century problems like alternative energy. “It’s taken longer and it’s been harder to do,” she said. This does not come as a complete surprise to Douglas M. Cohen, managing director at Athena Capital Advisors. Cohen said that not all the options for impact investing have good track records.
Define your priorities
One of the challenges of measuring “impact investment” the way someone would measure automobile investments or oil and gas investments is the variety of ways to interpret the term.
“Everyone has a different definition of impact investments,” Cohen said. “Some people say no fossil fuels and that’s their negative screen. Others say, ‘I understand these companies are going to exist, but I want to find the one that is doing it the best.’”
Case said she needed three things to assess an impact investment: intention to have impact, measurement of results and transparency.
Erika Karp, founder and chief executive of Cornerstone Capital Group and a friend of Case’s, said the two define impact investing differently.
“All investments have impact,” Karp said. “Jean has spent years as more of a purist than I am. She wants measurement that is more precise. I believe it’s more diffuse.” A screening process that is too narrow can also increase the risk because clients may wind up investing in new companies or first-time funds without track records, Cohen said.
Set your expectations
Setting expectations is crucial in the selection and measurement of impact investments because the manager will otherwise fail to deliver what the client wants.
“I think it’s important to lay things out up front,” Karp said. “There should be no excuses.”
The HIP ratings include the fund’s returns as another factor in actual and adjusted grades for companies. Most of the fund returns in the STOK 401(k) plan, for example, are from the middle to upper end of the HIP range.
Amit Bouri, chief executive of the Global Impact Investing Network, said his network has developed themes that people can invest in, like clean energy and affordable housing.
Still, to increase the power of impact investments, all investors are going to need to consider investments in that light.
“It cannot be a do-gooder thing,” Case said. “We don’t want to have diversity because it’s a box we check. We want to have diversity because we’ll be a stronger economy in America and around the world.”