Christopher Stroop
Aligning your investments with your values seems like too good a deal. Many people ask, “What’s the problem?” Below, he explores and debunks three common myths about impact investing.
Myth 1: Investing for value requires sacrificing returns
A NerdWallet survey found that people are skeptical of sustainable investments. This is because they feel that value-based criteria impede their progress in achieving the best returns. An analysis by RBC Global Asset Management found that socially responsible investing may increase, rather than reduce, investment returns. The study showed a positive relationship between overall stock performance and strong environmental, social, and governance factors.
After some thought, this data makes sense. Evaluating these criteria will provide more complete and reliable information about the company, leading to more effective investment decisions. A thoughtful, disciplined, long-term investment strategy is perhaps the best recipe for long-term success.
Myth 2: Impact investing is a passing fad
If millennials have anything to say about it (they do), impact investing will be around for the foreseeable future.
As The Wall Street Journal reports, millennials are now squarely positioned for massive wealth transfers and will soon receive nearly $35 trillion from their elderly relatives. This growing purchasing power indicates that this generation will have even greater influence in the years to come, and impact investing is an issue on which many are deeply concerned.
According to an MSCI report, 88% of high net worth millennials are actively reviewing their investments for ESG impact. More importantly for advisors, nearly 90% of millennials expect their financial advisor to understand his ESG factors and history of a company before making an investment proposal.
With numbers like this, it’s clear that impact investing is here to stay.
Myth 3: There is no way to track your impact
The primary reason for engaging in impact investing is to have a positive and desirable impact on business, the environment, communities and the world at large. Unfortunately, it’s a worthy goal that too many feel untrackable.
The same NerdWallet study points to these hurdles to value-aligned investing. He 77% of investors do not believe companies will live up to their social responsibility commitments. Additionally, 73% say they struggle to find evidence that companies are delivering on these promises.
To help you understand if a company is nearing the end of the negotiations, here are four resources to help investors understand how impact funds are performing.
1. MSCI ESG Ratings inputs sustainability scores and tracks company performance against various ESG criteria.
2. Morningstar Sustainability Ratings help investors understand the impact of their investments.
3. As You Sow is a non-profit organization that provides investors with a comprehensive introduction to the key factors of corporate sustainability.
4. Sustainalytics is software that provides risk rankings of companies based on ESG criteria.
There are many tools at your disposal to inform your clients of your company’s commitment to sustainability factors. This means clients can be confident that their investments are really delivering the results they want.
Christopher Stroup, MBA, CFP® is an LGBTQ+ Financial Advisor working for Abacus Wealth Partners in Santa Monica, California. His focus is on startups, senior executive members of Fortune 500 companies, and LGBTQ+ entrepreneurs.
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