By R. Paul Herman
Solving human and environmental problems with investment portfolios builds a better world—and can yield higher income and profits too.
Would a responsible executive purposefully invest their retirement money to underpay people, destroy nature, or foster corruption? Today’s business world can be quite volatile, and if people choose to operate in this way— intentionally or not—their portfolios might not survive.
Alternatively, why not intentionally invest retirement in companies that pay a fair wage, efficiently use natural resources and replenish them, and act transparently in balance with all of society? A retirement fund can help build a better world and—as real-world evidence and academic studies show—bear greater financial rewards.
Investing for impact is a compelling theme—one that garners 21 percent market share as of 2016, and represents nearly $9 trillion of invested assets, according to the U.S. Sustainable Investing Foundation. The concepts of “socially responsible investing” (SRI) and “environmental, social, governance” (ESG) focused portfolios may be familiar already. All three of these—impact, ESG and SRI—are preferred by 71 percent of all individual investors and 81 percent of millennial investors, according to Morgan Stanley. It’s also worth noting that 50 percent of women and 90 percent of children who inherit a financial advisor after a death typically fire that advisor.
More than 2,000 academic studies, including those conducted by Harvard Business School, MIT, and Oxford, have shown a positive correlation of higher returns, lower risk or both from pursuing an impactful, sustainable, or responsible portfolio. Morgan Stanley also found that mutual funds with an impact, ESG or SRI focus outperform two-thirds of the time.
Net Impact, a global network of 20,000 students, MBAs and professionals, has documented more than 200 universities including impact, ESG or SRI investing in their curricula. How can impact, ESG and SRI investing benefit the world and individual portfolios?Holistic problem-solving provides investment opportunities across all asset classes, which can deliver stronger, more resilient portfolios.
Holistic Solutions to Pressing Problems
Maslow’s hierarchy of needs outlines that the universal need for food, water, clothing, family, love, and other physical and emotional fulfillment must be met before one can self-actualize. Many seemingly intractable global problems today can be solved by companies, governments, and non-profits, which one can invest in. In 2004, the HIP (Human Impact + Profit) framework analyzed all investing according to five themes: health, wealth. Earth, equality, and trust. All stocks, bonds, and investments can be assessed by the products and services that serve their customers, citizens, and beneficiaries and how those entities operate and make decisions sustainably.
The Newsweek Green Rankings rate companies’ products, operations, and leadership for eco-efficiency. Toyota’s global cars include hybrid engines, which are more fuel-efficient and lower emissions, than Nissan’s world-wide car mix. The Tesla electric cars are the most “green” environmentally. These rankings can shift investing and consumption decisions, and also show a portfolio of the leading firms that can outperform financially.
Climate action is one of the leading themes in impact investing today and includes “going fossil-free,” or excluding the 200 largest owners of coal deposits and reserves of oil and gas, all of which are carbon-intensive. Some investors even exclude oil pipelines (which can spill); natural gas tracking (which can pollute groundwater); and services firms like Halliburton. Mutual funds such as Green Alpha’s Next Economy fund, the Pax Global Environmental
Markets, Trillium’s Portfolio 21 and Etho Capital’s ETHO index fund are fossil-free and invest in a cleaner energy future. Any mutual fund can be tested for free at FossilFreeFunds.org. Even 401(k) plans at small firms offer fossil-free portfolios to their entire staffs via impact advisors like Green Retirement Plans.
The need for cleaner water is a global theme, as overpopulation and increasing industrialization have put fresh water at risk. Guggenheim and First Trust offer mutual funds, including water purification, but surprisingly, some water-focused firms also own gun producers like Winchester. In other words, be aware when selecting investments.
Ensuring global equality for women in leadership roles is compelling for conscious investors. Yet there are still less than a handful of investment firms offering a specific focus on solutions to boost women’s equality—like Nia Global Solutions, which focuses on 50 firms innovating for women’s health and equality; Pax Ellevate Global Women’s index fund, which supports leadership in large corporations; and Barclay’s Women in Leadership indexed note.
The United Nations also established the Sustainable Development Goals, which leading firms such as Whirlpool, Unilever and Novo Nordisk are integrating into their product development and business strategies, according to Sustainable Brands. Investment funds are beginning to align their strategies with one or more of the 19 goals outlined, including fighting poverty, increasing health, and providing clean water.
Investors Focused on 100 Percent Impact
Envisioning the future enlightens how one invests. Foundations such as F.B. Heron have targeted 100 percent impact investing for more than a decade. Blue Haven Initiative is allocating its hundreds of millions to a healthier, eco-balanced world. Becker College’s endowments is pursuing 100 percent impact across its entire portfolio.
Every investment has an impact, so investors allocate to net-positive solutions. Opportunities abound across all asset classes and risk levels. The safest impact investments are savings or Cds in a bank, like New Resource Bank, which then loan to sustainability-focused growth firm.
Community development financial institutions (CDFIs) finance improvements in local neighborhoods and cities. A new firm, Cnote, combines multiple CDFIs into one investment note that pays 2 percent interest. Investing in cities, hospitals and school districts—which is typically tax-free—via municipal bonds has positive intentions, but the impact and outcomes are not attached to the bonds. Neighborly.com is an online municipal bond marketplace that helps users find high-impact bonds, including those with an impact rating from the 32,500 ratings of municipal issuers by HIP Investor. Municipal bond investors can finance clean energy, low-income school districts in need of funding to spur higher student potential, and funding for women entrepreneurs in diverse cities.
Millionaire/billionaire investors, such as Bill Gates, can allocate funds in clean energy, sustainable real-estate, and private equity overall that pursue holistic solutions. DBL Partners and SJF Ventures have funded problem solvers, including Tesla Motors, Solar City, Revolution Foods (for healthy school lunches), and Vital Farms (for sustainably farmed eggs). Even funding the ecosystem of artists pursuing their craft serves investors in Upstart Co-Lab.
Investors using advisors may need to aggressively ask for what they want, as the majority of advisors still think in the old 20th-century model of making money at any cost. But progressive investment advisors can be found at First Affirmative Financial Network and on platforms such as Folio Institutional and EQIS, which also enable access to new impact. Specifically they add access to ESG and SRI strategies that can be even more impactful than those available in mutual funds. Retirement plans and 401(k)s also are not very impact-focused, but QBOX, and Social(k) are serving employers with millennials seeking impact for their retirement portfolios.
Positive Profit Potential
Smart investing looks at the drivers of future risk and financial return. CEOs frequently say people are their greatest asset, but then they seek out the lowest-cost employees. People invent products and serve customers, but they still are not classified as an asset on the financial statements. Firms that do treat people as an asset and have high employee engagement typically also see higher customer satisfaction, more referrals, and thus higher revenue. Treating employees well can yield a positive return on investment, and this is one factor of higher financial performance in all impact, ESG and SRI investing.
In fact, over the past 10 years nearly 5,000 companies evaluated for impact results show that firms focused on higher sustainability earn higher returns on equity or profit. Conversely, lower sustainability firms earn lower returns on equity and even generate losses.
Investing for impact is growing; it’s desired by current and upcoming generations of leaders; and it’s compelling financially. Why not make investments that build a better world? Especially when impact investing can both do good and make money at the same time.
R. Paul Herman is the CEO of HIP Investor.