There is a maxim in investing that many have come to embrace: “All investing has an impact. The question is whether it is positive or negative.”
I’ve been investing for impact for many years and take that maxim to heart, seeking to align my investments with my values. To be honest, this was an aspirational goal for a long time. Investing for impact at scale proved difficult as few investing alternatives across asset classes focused on impact, and reporting on environmental, social, and governance factors (ESG) was nascent.
The process was also frustrated by the lack of transparent disclosures and readily available metrics about the impact and ESG priorities of a fund or company. I knew I wasn’t alone in my frustration, but the mainstream investing world showed little interest in companies’ and funds’ social and environmental commitments at the time.
The picture is quite different now. Nowadays there is an explosion of interest in using investment capital to align with values, whether institutional or individual. In the past two years alone inflows into ESG funds had a 10-fold growth to $51.1 billion.
There is a growing belief that investment capital can be used as a powerful tool to drive benefits to society and the environment and help mitigate investment risks without compromising portfolio returns. And the best news for investors? An expanding body of data reports that ESG investments actually outperform, such as in 2020, when 25 of the 26 ESG equity index funds tracked by investment researcher Morningstar beat the benchmark for their category.
As demographics have changed in recent decades, new classes of investors have helped drive ESG and impact investing. These new segments include millennials and women, whose economic power has grown and whose value-aligned focus as conscious consumers extends to conscious investing. Meanwhile, growing global movements around climate change, gender equity and racial justice have also played a role in driving engagement.
Despite this impressive momentum, the market hasn’t quite caught up when it comes to measurement, standards and transparency, leaving investors working hard to identify tools and resources to guide their values-aligned investing. Building the confidence to align with your financial and social goals can be daunting, especially for new investors. So it’s important to learn about the expertise, tools and resources available to help you maximize the positive impact of your capital. Here are three tips to get you started:
1. Define what matters most to you: When deciding what will make it into their investment portfolios, many investors start with “screening” to ensure they include (positive screening) and exclude (negative screening) certain types of investments to more closely align with their values.
For instance, you can screen out mutual funds or exchange-traded funds that invest in tobacco or weapons manufacturers, if that is important to you. Similarly, if you care about the environment and renewable energy, you can screen for funds that invest in this area. If you work with a financial adviser or some other platform, they may also have a proprietary screen template that they use or recommend to help you define areas of investment.
2. Choose a trading platform or adviser: Investment advisers can play an essential role in helping investors craft a personal portfolio that aligns with their values. Advisers scan the market and serve as indispensable guides, particularly for new investors. Just be sure that the adviser you choose is knowledgeable about ESG and other values-aligned investments. In addition, major trading platforms and brokerage firms including Vanguard Group, Charles Schwab and Fidelity Investments offer mutual funds and other products that have been developed with values-focused investors in mind.
3. Follow the data: Companies measure what matters. That’s why it’s vital to look for transparency in their intention, measurement and reporting of ESG factors to determine if a company or fund is authentic about its ESG or impact claims. Until standards emerge, the burden is on investors and advisers to follow the data trail —but there are firms doing some of the heavy lifting on this front that provide good insights for you to use as a reference.
Many companies across sectors are self-reporting their ESG progress and commitments in their annual reports and often in dedicated reports on sustainability. For a more independent view, several firms provide information on disclosures. CDP is a non-profit that puts pressure on companies to disclose data to measure and understand their environmental impact. The website allows you to see what many public companies have and have not disclosed. For example, CDP data shows that Apple disclosed its plans to fight climate change in 2019 and 2020, but did not submit any reports on water security in either of those years. While focusing on disclosure alone is often not enough, it’s a good initial step to see if the companies you are interested in have action and reporting plans in areas that you prioritize.
MSCI is one of the most comprehensive ESG data providers and is often a key element in the arsenal of forward-thinking financial planners. Their most powerful tools come with high subscription costs, but individual company ratings are available to all on their website. MSCI also provides similar information on ESG-focused funds.
You can also leverage insights from Sustainalytics, which measures a company’s risk exposure and offers “ESG Risk Ratings” for the financial industry on a subscription basis and provides a free company-by-company lookup tool for individual investors — similar to MSCI. Sustainalytics also has helpful videos breaking down its methodology and focus on providing tools to measure risk.
Another resource worth utilizing is S&P Global’s ESG metrics. As with Sustainalytics and MSCI, you can search for ESG ratings of individual companies. Ratings are based on companies’ responses to a questionnaire. S&P Global provides three additional sub-scores for each component of ESG, which can give you more information on the balance of activities that go into the full score.
Jean Case is chairman of the National Geographic Society and CEO of Case Impact Network, which identifies best practices and strategies on how to invest for impact.