Investing For Impact

What is Sustainable, Responsible, Impact Investing?

A sustainable and responsible approach to investing includes both quantitative and qualitative analysis.  All investors look for profit potential, but responsible investors also integrate an evaluation of Environmental, Social, and Governance (ESG) factors into the investment decision-making process.

A double bottom line (quantitative +qualitative) analysis provides the basis for designing investment portfolios aligned with personal values and social priorities, while delivering the returns needed to achieve an investor’s financial goals.  The process considers the impact of an investment on all stakeholders, within the context of rigorous financial analysis.

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Sustainable, Responsible Impact Investing or Socially Responsible Investment which share the acronym SRI, refer to investing consistently with one’s values. The terms Impact Investing, Ethical Investing, Green Investing, ESG Investing, and Mission-Based Investing are also sometimes used.  Though each has a slightly different connotation, in each case the investor recognizes the impact that companies have on the communities and environment in which they do business.  They expect the companies they invest in to behave ethically and transparently.  They expect them to be profitable now and in the long run by contributing to a sustainable and just economy.

Call it what you will, SRI has deep roots, emerging as a distinct part of the financial services industry in the late 1920’s.  Much of the impetus came from faith-based investors who preferred to not invest in military weapons, alcohol, tobacco, or other “sins.” The anti-apartheid movement in the late 1970’s brought SRI into the mainstream.  For a more complete history of SRI, download First Affirmative’s Socially Responsible Investment In the United States,  by Steve Schueth, President of First Affirmative Financial Network.

Once viewed as a fringe movement, today over $8.7 trillion are invested in U.S. markets with ESG criteria applied.  According to USSIF, these assets now account for more than one out of five dollars under professional management in the U.S.

Screening means Better Companies

Traditional financial analysis is an important starting place in evaluating potential investments. Portfolio screening is an added layer of investment analysis that evaluates companies on environmental, social, and governance (ESG) criteria. ESG integration can result in screens which are either positive or negative.

For example here’s a tool you can use now to look for fossil fuel companies in your current mutual funds:

How We Screen Your Investments

Environmental Screens

Environmental screens help analysts evaluate environmental impact by looking at quantitative variables like carbon emissions and environmental fines, as well as qualitative commitments to sustainability and green business practices.

Social Screens

Social screens may evaluate companies on the strength of their human rights policies and consider whether a company operates in regions of armed conflict or human rights abuses, gender and racial equity in the workplace, and product safety. Social analysis helps identify companies with stronger non-discrimination policies and better employee relations.

Governance Screens

Governance Screens examine the culture of a company. How does the company make decisions regarding executive compensation, salaries, and benefits? Does the company value gender and racial diversity on its corporate board? Do they disclose their political contributions and lobbying activities? Analysts may consider legal and regulatory issues a company has faced related to discrimination, fair lending, or other ethical issues.

Negative Screens

Negative screens exclude companies that don’t meet certain standards for environmental sustainability, human rights, or employee relations. Today, many SRI investors are choosing to exclude companies involved in the production of fossil fuels from their portfolios. Some may screen out companies involved with nuclear power, GMO’s, or animal testing, while others may decide to reflect different ESG priorities in their investments. Historically, companies involved in the production of tobacco, military weapons and alcohol have been excluded from most social investment portfolios.

Positive Screens

Positive screens can identify best in class performers or companies in specific sectors such as renewable energy and sustainable agriculture. Companies with a high proportion of woman and minorities in senior management and board positions might similarly be screened in.

Shareholder Advocacy

Investing in stocks means becoming an owner of shares in what are often very large companies. Decisions these companies make affect not only the communities in which they operate but potential risks and returns to their investors. Investing for impact means we don’t just “hold” shares, we actively “own” them and actively use them to effect change. So the term “Shareowner Advocacy” is often used.

Shareholder advocacy describes a process of engaging with companies on environmental, social, and governance (ESG) issues to improve performance and impact. Hence, the term “Shareholder Engagement”.

Corporate Engagement

Companies are increasingly willing to work with shareowners and other stakeholders to address environmental, social, and governance (ESG) topics, including equal opportunity employment, sustainable resources, climate impacts, the rights of indigenous peoples affected by resource extraction, and much more.

Shareholder Resolutions

When corporate engagement is not successful, filing a shareholder resolution can be an important tool for raising awareness about ESG issues among a wider base of shareowners. First Affirmative and many of its partners actively engage in filing and advocating for resolutions during each “proxy season.” For a comprehensive overview of First Affirmative’s 2016 advocacy initiatives, see their 2016 Shareowner Advocacy Update.

Proxy Voting

Investors can make their voices heard in corporate board rooms by voting their proxies. Since clients are not able to attend the annual meetings of each corporation in which they hold stock, we hire a proxy voting vendor to vote electronically, on behalf of clients in First Affirmative programs, according to our comprehensive Proxy Voting Guidelines.

* Our proxy voting policy is to vote on any position in which First Affirmative clients own more than 250 shares on the Folio platform, and all shares on the Schwab platform.

Public Policy

Business regulators need strong and effective input from conscientious investors. From what information companies are required to disclose to the SEC to how effectively government regulators enforce environmental laws, responsible investors engage policy-makers by writing letters, making phone calls, and providing research and information to help further sustainability goals.


Entering The Fray

Our level of Advocacy increases each year. In 2016 we participated as representatives with First Affirmative and their partners to file 13 resolutions. These included a resolution to Amazon to issue a sustainability report, a resolution to Whole Foods was filed to report on company actions to assess, disclose, reduce and optimally manage food waste. First Affirmative was lead filer on an important environmental issue at Kinder Morgan involving fossil fuels. You can read the full resolution here.

Community Impact Investing

Many low-income communities throughout the United States as well as in other countries lack access to capital through conventional channels. When loans from commercial banks are unavailable, it can be difficult for people living in economically disadvantaged areas to secure affordable housing or start a small business. Community impact investment organizations step in to fill the gap by offering basic financial services in underserved communities. In addition to providing loans, many of these organizations offer education and technical support to help their borrowers succeed.

It is common for socially conscious investors to direct a portion of their assets to community impact investments. Overall, about 3% of the assets we manage are invested in this fashion.

Community Development Finance Institutions (CDFIs)
CDFI’s work to create jobs, provide affordable housing, and finance small business development.  The CDFI designation is available to banks, credit unions, community load funds, and affordable housing developers that meet criteria of the U.S. Department of the Treasury.
Microfinance or Microcredit

Microfinance or microcredit organizations frequently operate in developing countries, where a loan as small as $25 may be enough for an entrepreneurto start a business and build a better life for his or her family.

Mutual Funds
Several mutual funds available to our investors focus on community investment bonds offered under the terms of the Community Reinvestment Act (CRA).  CRA’s purpose is to finance affordable housing and small business opportunities in underserved communities. Other available funds earmark a small portion of their assets for micro-lending.
Community Development Notes
These notes are used to finance various community investment programs. Larger investments in these notes may be directed to particular projects or concerns, for example, women in developing countries, education projects, community health, sustainable agriculture, or other micro-enterprises.  Such investments may intentionally have a below-market return in order to support worthy borrowers.

Partnering Up

First Affirmative has partnered with two organizations to offer Impact Investments directly to our clients.

  • The Calvert Foundation provides loans at below-market interest rates to enterprises creating affordable housing, education, environmental protection and many other initiatives around the world.
  • The TriLinc Global Impact Fund invests in small and medium sized enterprises in developing and developed countries with the intent to earn competitive returns and having a positive impact in these growing markets.

Performance – You don’t need to separate good fortune from good will.

It’s common for investors to ask whether a portfolio that uses sustainable, responsible and impact investing strategies will perform differently than a portfolio that does not consider SRI or ESG factors. Contrary to what some might believe SRI investors have, in fact, fared quite well.

The Numbers

The broadest measure of responsible portfolio performance, the DSI 400 Social Index, has outperformed the S&P 500 since inception in 1990. Since its inception in April, 1990 through September, 2016, the DSI 400 has returned an average 10.11% per year. Over the same period, the benchmark S&P grew 9.68% per year. When companies lead the way in environmental, social, and governance issues, we believe they are positioning themselves to prosper as well.

Our Approach

The broad range of competitive sustainable and responsible investment opportunities permits the development of a diverse, well-balanced portfolio for nearly every socially conscious investor. An impressive body of academic evidence and real-world experience has effectively busted the myth that doing something good with your money will automatically result in lower returns.

Risk and Return

All investing involves risk, and each portfolio will perform differently depending on when it was invested, your time horizon, how much exposure you have to various markets, and other factors, including consumer prices and inflation. The best way to approximate your own possible investment performance is for you to discuss your goals and expectations with us.

Mention of specific securities is not a recommendation to buy or sell

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Ken Jacobs CFP®, AIF®, CLU and Renee Morgan are investment advisor representatives of First Affirmative Financial Network (“First Affirmative”). Ken and Renee own an entity called Sustainable World Financial Advisors (SWFA) which is not affiliated with First Affirmative nor is it a registered entity. SWFA does not offer investment services, those services are offered by First Affirmative which is a Registered Investment Advisor (SEC File #801-56587). SWFA is a “doing business as” (DBA) name for use in its operations and should not be considered a registered entity offering investment services. The credentials CFP® & AIF® listed above bear trademarks. FAFN-Logo-(1)