Impact investing opportunities continue to grow with one of every five dollars being invested sustainably as of 2016. Regardless, there are myths about impact investing that continue to persist, despite evidence to the contrary. For our second post in a series on impact investing, we debunk these common myths.
Myth: My investment return will suffer if I implement an impact investing strategy.
Deutsche Asset Management and the University of Hamburg aggregated the findings of over 2,000 studies in 2016. Around 90% of the studies concluded there is either a neutral or positive correlation between a company’s ESG ratings and financial performance. Morningstar Research completed a separate evaluation and came to the same conclusion – there is no performance penalty associated with impact investing.
Myth: Impact investing is for rich people.
There are impact investments that only accept accredited investors, individuals who consistently make over $200,000 per year or have a net worth of over $1M (excluding their residence). However, if you don’t qualify as an accredited investor, you still have plenty of options. Examples include:
- Mutual funds and ETF’s that are ESG-focused
- Green bonds which finance projects that have positive environmental benefits
- CD’s that help fund projects in your local community, such as affordable housing
Myth: An impact investing strategy simply excludes “sin” stocks or industries such as tobacco, guns, alcohol, and gambling.
Divesting from controversial stocks or industries, also known as negative or exclusionary screening, may be part of an impact investing strategy. But it is not the only tool, nor is it the most effective. When constructing a portfolio, investors should take a holistic approach that starts with documenting their values and financial goals. Next, they can identify appropriate strategies, which may include evaluating ESG ratings, divestment and engagement. Finally, investors should analyze how implementing the chosen strategy affects the risk and return characteristics of the investment portfolio. Research shows that divesting from controversial stocks or industries in an ad hoc manner can lead to portfolio underperformance and is therefore not recommended.
Myth: Social or environmental change should be the responsibility of governments and philanthropists, not of investors.
The Sustainable Development Goals (SDG’s) developed by the United Nations focus on “ending poverty, protecting the planet and ensuring that all people enjoy peace and prosperity”. These goals cannot be met by governments and philanthropists alone. Impact investors are filling the gap by providing capital and resources. They are also developing innovative ways to work with governments and philanthropists to advance change, such as pay for success programs. These programs accept private investors’ money to expand social programs that have already proven to be effective. After an evaluation period, if the program reaches the pre-determined goals of benefiting society and generating value for the government, the government remits payment (principal and return) to the investors. If the program doesn’t meet its goals, the government pays nothing.
Myth: Creating an impact investment strategy is too difficult.
While creating any investment strategy requires time and effort, creating an impact investing strategy is only getting easier as the number of available resources and vehicles continues to grow. If you want help, engage a fee-only, fiduciary advisor who is knowledgeable about impact investing and willing to take into account your values versus an advisor who insists on doing “business as usual”.