Impact Investing 101

By Dale Wannen

As I was driving into a Whole Foods’ parking lot last week, I couldn’t help but notice how many Priuses were in the parking lot. Walking through the crowded aisles, the blaring signs of Organic and GMO-free labeling decorated everything from produce to potato chips to pickles. And then, when I got home, I noticed that my wife was using non-toxic cleaning products and our baby girl was dressed in a fair-trade organic cotton onesie. This got me thinking, “Are people doing the same with their investment portfolio?”

The idea of Sustainable and Responsible Investing (SRI) isn’t a new one. It has been around for decades and really came to life during campaigns to divest from companies that were involved in the apartheid movement of South Africa during the 70s and 80s. Today’s big movement is to divest from companies involved in the fossil-fuel industry. This ethical element of investing is gaining serious interest with about one out of every eight dollars now following some sort of social or environmental mission. So, what exactly does it mean to be an “impact” investor?

"This ethical element of investing is gaining serious interest with about one out of every eight dollars now following some sort of social or environmental mission."
  • Environment, Social, and Governance (ESG) Screening
  • The first item, ESG screening, basically screens out companies that don’t align with an investor’s values. Do you cringe when you open your brokerage statement to see polluting oil companies and large greedy banks at the top of your holdings? If so, then you may want to consider shifting into SRI. If corporate governance equality is a concern, then a company with an all-male board of directors may not fit your criteria. On the flip side, if a company is using all organic and grass fed beef in its supply chain, then it may be a consideration for your portfolio. ESG screening is really at the core of what sustainable investing is all about. It gives the investor the chance to really be proactive about what is in his or her portfolio and at the same time not relinquish any potential for long-term gains. 

    In many cases, most of us own the mutual funds that hold the individual stocks. If that is the case, learn more about the funds. In the prospectus of the fund, there is a list of every single stock position along with an investment philosophy. Because you are a paying customer of these fund families, you have every right to contact them to ask if they are considering the integration of any environmental or social screen within the fund. There are a plethora of sustainable mutual funds being offered in the world of investing. If one has a retirement plan at the workplace, the HR manager may be able to answer questions on what options there are for sustainable investing.

    One major misconception is that you have to give up returns in this type of investing. This misconception was something that came up decades ago during the major movements to alternative energy stocks. Today, studies are now showing that companies who are integrating sustainability into their businesses may be better suited to manage risk and at the same time reap rewards on Wall Street.

  • Shareholder Activism
  • The second item, shareholder activism, is simply a more direct and organized way of addressing a company and its executive team on issues that the company may not be handling well. When investors purchase stock in a company, they are now owners of this entity. A shareholder has the right to file a shareholder resolution. These proposals can bring forth major positive changes at an organization. Some examples include the implementation of an electronic recycling and takeback program at Best Buy, the use of cage-free eggs at Denny’s restaurants, and questioning of executive compensation packages at Oracle. About 400 shareholder proposals make it onto the proxy statement of major S&P 500 companies every year and support for these resolutions is at an all-time high.

  • Impact or Community Investing
  • And thirdly, impact or community investing is a way to direct investment dollars toward what may be considered more impactful avenues. There are many vehicles that will take your investment dollars and support enterprises in education, agriculture, and ecological stewardship. They, in turn, may give a return to the investor. This capital may be in a range of forms, including equity, debt, working capital lines of credit, and loan guarantees to organizations throughout the world. Examples of projects in recent decades include investments in microfinance, community development finance, and clean technology.

    Some investors are driven by their personal values and goals, their institutional mission, or the demands of their clients. Some investors want strong financial performance, but also believe that their investments should be used to contribute to advancements in social, environmental, and governance practices. Evidence is starting to show a strong link between ESG and financial performance. And let’s face it, if you can screen the “evil-doers” of the world out of your investments, and at the same time not sacrifice your returns, then isn’t it a win-win?

    Dale Wannen is President of Sustainvest Asset Management, an independent investment advisory firm based in Northern California that specializes in socially and environmentally responsible investing, helping clients meet their financial goals without having to sacrifice their morals. He can be reached at dale@sustainvestmanagement.com.

    This article appeared in Issue 1 | Winter 2015

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