By Surya Kolluri, Managing Director, Global Wealth & Investment Management, Bank of America
In past years, investing in one’s environmental, religious and personal values focused mainly on negative screening, which involves determining which securities to keep out of your portfolio. This approach has historically been referred to as socially responsible investing. Today, a more positive approach is steadily growing more popular, which has contributed to the increasingly utilized term impact investing.
According to the 2016 U.S. Trust Insights on Wealth and Worth® survey, a majority of investors feel that it is more important to invest in companies that will have a positive social or environmental impact than it is to boycott companies that are harmful in this regard. Additionally, a 2014 report from the Forum for Sustainable and Responsible Investment (US SIF) found that values-based investing accounted for $6.57 trillion, or roughly one in every six dollars under professional management. This number is 76% higher than the $3.74 trillion noted in US SIF’s 2012 report.
Investors should consider companies with strong fundamentals when weighing impact investing, and seek out corporations that earn revenue through their management of human capital, environmental stewardship and good corporate governance. These three socially responsible categories offer investors an opportunity to combine competitive investments with their personal values.
One category of impact investing is known as thematic investing. An example of a thematic investing approach is “Gender Lens” investing. These investments focus on improving the lives of women and girls and often reflect a values-driven approach to human capital management. In many cases, companies with progressive policies toward gender equality are well run and frequently are able to recruit and retain top talent. According to the 2016 U.S. Trust Wealth and Worth study, female investors are much more likely than their male counterparts—73% to 46%, respectively—to consider the social and environmental impact of companies they invest in.
Environmental stewardship examines the use of alternative energy and clean tech and explores the impact on climate change and water sources. Companies that focus on sustainable efforts will often be rewarded with cheaper operational costs. Ultimately, investors may benefit if a company’s cost-saving technology produces a higher profit.
It is important for impact investors to understand how a company operates. Corporate governance focuses on disclosure, incentives, reporting and corporate transparency. Investors can determine whether a company believes in full disclosure and how well it communicates with stakeholders by carefully studying the company’s website. The trend of impact investing is changing the wealth management space and creating a new, more active approach.
There is a growing awareness that strong corporate financial performance and social responsibility are not mutually exclusive; rather, they are mutually beneficial. These factors of environmental, social and governance (ESG) have become increasingly important not only in identifying opportunities to invest in companies with a strong positive corporate culture, but are equally important in mitigating and avoiding potential investment risk associated with companies acting otherwise.
There is an increasing demand from both institutional and individual clients for investment opportunities focused on environmental or social value sets. In the U.S. Trust study, almost six in 10 investors say the social and environmental impact of the companies they invest in is important to their investment decisions, and 40% believe that companies that adhere to good social and environmental policies and practices are less susceptible to risks. Investing in securities involves risk, and there is always the potential of losing money when you invest in securities.
With a balanced approach, you have the potential to make impactful investments. Work with a financial advisor who understands your long-term needs and investment personality, but who also understands what you value most.
For more information, contact your Merrill Lynch Wealth Management Advisor Gardy Bloemers in the Charlottesville, Virginia office at 434.984.4752 or Gardner.bloemers@ml.com.
This article is designed to provide general information about ideas and strategies. It is for discussion purposes only since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.
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