Make money and be different

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The philosophy behind impact investing

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For a certain type of investor, only one thing really matters. Did the stock go up? Not so long ago, that was the description for just about every investor. Today, more and more investors are very concerned about the type of companies they invest in and the future they will build. “What kind of world will my investment create?” they ask themselves. It can be as simple as not investing in fossil fuel companies, or it can be specific to companies based on how well they treat their employees and the environment. Impact investing is still only a small part of the overall market, but it has reached trillions of dollars and is growing rapidly.

Business Case

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Perhaps the biggest signal of the power of impact investing came in 2020, when BlackRock, the world’s largest asset manager with at least $10 trillion in assets, announced sustainability as its new investment criterion.

“In the near future — and sooner than most people expect — there will be substantial capital reallocations,” Chief Executive Larry Fink wrote in his annual letter to chief executives. “Every government, company and shareholder must face climate change.”

Fink links climate risk to investment risk, essentially stating that having a functioning planet that can survive is a good thing, and that the worst effects of climate change can have untold consequences.

While governments in more than 130 countries, which account for nearly 90 percent of global emissions, have some sort of net-zero target, they cannot realistically achieve them without private sector cooperation.

“We have to involve business because, in general, business is stronger than any government, and certainly stronger than philanthropy,” Beth Sirull, CEO of the San Diego Jewish Community Foundation, told eJewishPhilanthropy.

If stakeholders tell them, businesses will jump in. As Sierra Club executive director Michael Brune wrote of BlackRock’s announcement, “largely because millions of us are standing up and demanding that businesses tackle the climate crisis. .”

Impact investing isn’t just about climate, either. Investors can choose to focus on advancing gender and racial equality, or help any group that has traditionally not had a fair share of opportunities. Newday Impact president and COO Anne Popkin told BOSS that companies that don’t embrace diversity and inclusion will do worse in the long run than those that do.

“You don’t have to believe in social justice reasons,” she said. “It’s an economic issue. You don’t have to do it for social justice; you should do it for business reasons.”

Focus on ESG

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When making sustainability its standard, BlackRock has vowed to use ESG to optimize index exposure. Impact investors and companies looking to attract them often rely on ESG ratings to tell them how well they are doing on environmental, social and governance issues.

Unfortunately, without a central ESG clearinghouse, ratings are easily manipulated. If all a company cares about is being able to say they have a good ESG rating, there is an opportunity for deception. Ratings also tend to measure a company’s relationship with other companies, rather than an ideal standard.

Often the best you can hope for is transparency, especially when rating services analyze as many as 700 different ESG criteria. That’s why analytics from services like Sustainalytics are so valuable. Their mission “is to provide investors and companies with the insight they need to make better-informed decisions that lead to a more just and sustainable global economy.”

Companies and investors rely on their data and their own rankings to determine which companies meet their impact investing criteria. For example, Newday filters out fossil fuels, armaments, gambling, tobacco, alcohol and child labor. It also measures a company’s behavior toward its stated goals. Those who do not deliver on their promises are screened out. When it comes to impact investing, you often need to dig a little deeper to make sure you support who you want to be.

yes you still make money

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After all, impact investing is still investment, not philanthropy. Impact investors still want to make money. So how are they doing? According to the Global Impact Investing Network’s 2020 survey, 88% of impact investors said their portfolios met or exceeded their financial expectations. That happened without sacrificing other goals; 99% said they met or exceeded their impact expectations. The analysis showed that the median impact fund achieved a return of 6.4%.

Women, in particular, “tend to be more value-oriented investors,” Popkin said. “Right now, they’re not taking a huge hit on their portfolio returns by doing this, but of course they care.”

As a result, there has been a huge inflow of capital into impact investing. They try to drive social and environmental change while making money. While impact investing itself may be a new concept to many, the overarching concept is an old one: put your money where your mouth is. Businesses respond to their market demands. The market is a group of people, including you. If enough investors make it clear that they support certain practices, you can bet that companies will jump in and not fall behind.

It’s buying the changes you want to see in the world. The rewards can be huge.


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