Investing often means owning stock in large, corporate companies that may not make friends in the environmental community. It’s hard to avoid, especially if you’re looking at owning a large portion of the market through an index fund. Recently, however, ethical concerns have spurred a push toward impact investing that aims for sustainability and an environmentally-friendly approach, and funds and investment options have emerged to deal with these investors.
“At Bank of America Merrill Lynch we’ve been talking to clients, doing surveys, focus groups, town halls—it’s very clear to us that the singular driving force is interest by clients,” said Surya Kolluri, a Managing Director for Policy and Market Planning for the bank’s Global Wealth and Retirement Solutions (BAC), at Yahoo Finance’s All Markets Summit in New York. “In the last three years, about 40% clients said yes. Last year it was 50%. Then an 8% jump this year.”
For Morgan Stanley (MS), which has a platform called “Investing with Impact,” the thinking was much different five years ago. Instead of stocks, bank leaders figured private equity, VC, and private debt would be the key levers pulled by investors. But instead, investors have been re-aligning their entire portfolios to avoid uncomfortable conflicts with their own ethics, said Hilary Irby, the head of Morgan Stanley’s Investing with Impact Initiative.
“The structure is traditional, mirroring traditional investments,” said Irby. “The tools to do this include traditional ‘negative screen,’ excluding things from a investment portfolio you won’t feel comfortable having exposure.” The opposite works as well: including things like investments in sustainable energy. Transitioning to this approach is a process, said Irby. Or, an investor can construct an entire portfolio from scratch around a theme.
“We don’t recommend changing an entire portfolio overnight,” Irby caveated.
According to Kolluri, the idea is simply to add “purpose” to the risk-return framework investors have been operating in.
A prominent example for avoiding conflict would be opting not to invest in fossil fuels. While the Trump Administration has been nothing but bullish on drilling and oil—former ExxonMobile (XOM) CEO Rex Tillerson was chosen as Secretary of State—people may not want to actively support aggravating what scientists universally view as an issue that threatens human existence.
“If I can used what’s happen since the election as an indicator, we’ve seen interest in environmental climate change,” said Irby. “One of the tools [people] have is their investment portfolio.” According to Irby and Kolluri, investors previously on the sidelines may get pushed into voting with their investment dollars. “It’s been persistent and growing,” said Kolluri.
Past any activism—if you can call it that—here’s even a compelling business argument for it, perhaps best illustrated by a pointed New Yorker cartoon in which a character muses to another in a post-apocalyptic landscape: “Yes, the planet got destroyed. But for a beautiful moment in time we created a lot of value for shareholders.”
In the past few years, there’s also been a push from faith-based investors, who were early leaders of this type of investing. Catholic values investors, for example, have been spurred on by the Pope’s comments that climate change should be a priority.
According to Irby and Kolluri, they’re constantly fighting to portray impact investing in a fair light. In the past, many of the approaches were derided as quixotic. However, recent studies of thousands of funds have shown these purposed options are competitive.
“There is a persistent belief that there’s going to be an automatic trade in returns,” said Kolluri. “It’s not a guarantee there’s a tradeoff. It’s not an automatic assumption anymore.” Irby concurs: “There’s a fair amount of research out there to find and address this concern.”
In Irby’s view, there’s another characterization of this approach: its narrow suitability.
“Many people think this is unattainable,” she said. “There are so many new strategies coming to market all the time—it can be successful to investors at all levels.”
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