Impact Investing: Creating a Strategy

/ Planning Within Reach - Memphis/
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Impact investing offers similar, if not better, returns than traditional investing with the added benefit of creating positive social and environmental change. That being said, creating an impact investment strategy does not have to be a major shift from what you are already doing. 

We recommend a top-down, holistic approach to impact investing versus divesting from companies or industries in an ad hoc manner, which can lead to underperformance. At a minimum, it can mean the inclusion of environmental, social and governance (ESG) ratings in the portfolio construction process. ESG ratings offer an additional layer of due diligence which has shown to increase returns, reduce risk, and encourage companies to be more transparent with important metrics that haven't traditionally been tracked. For example, we can now analyze how vulnerable companies - and therefore, portfolios - are to changes in regulation, commodity price fluctuations, or fraud in a consistent, systematic way. As of the end of 2017, two-thirds of asset managers were in the midst of integrating ESG criteria into the portfolio management process.

ESG ratings and rating changes (known as ESG momentum) are proving to be invaluable during the portfolio construction process. Here are two examples of controversies that were proactively flagged by ESG rating agencies:

Investors can obtain free ESG rating information. To demonstrate an example, let's use "SPY", which is an exchange-traded fund (ETF) that seeks to correspond to the yield and price performance of the S&P 500 Index.

  • Go to Morningstar.com and type "SPY" into the search field. Scroll down to the middle-right part of the page to see the Sustainability Rating, Score and Percent Rank in Category. The data is updated on a monthly basis from Sustainalytics. Read more about Morningstar's Sustainability Rating methodology here.

  • Many investment advisors have access to MSCI's ESG ratings on paid platforms, but others can view the ratings free for ETFs. For example, go to ETF.comand type "SPY" where it says "Search ETF.com". Click on the first link generated for the "Free Real-Time Quote." Scroll down to see the "SPY MSCI ESG Analytics Insight" which includes the ESG Fund Quality Score and Percent Rank in Category. Read more about MSCI's ESG Rating methodology here.

There are low-cost, passive, index funds that apply an ESG screen. Here are a few examples:

Recognize that there is more to impact investing than just ESG ratings - but the ratings are a good place to start.

  • There are a variety of ESG rating providers and each has their own unique methodology. Therefore, ESG ratings may differ for the same stock on different platforms, depending on the source.

  • Likewise, Fidelity's definition of a "sustainability index" is likely to differ from Vanguard's definition of a "social index fund." You need to dig deeper to understand how their methodology and composition varies.

  • There are other, non-ESG rated vehicles that can meet your financial goals while also having a positive social and environmental impact. For example, there are cash and fixed income alternatives that will invest your money in underserved communities or micro-finance institutions domestically and abroad. There are real estate investment trusts (REITs) that focus on net zero energy buildings, affordable housing, and transitioning conventional farms to organic practices.

At a minimum, use ESG ratings as an additional tool when creating your investment strategy. It makes good financial sense to put your money with companies willing to be transparent and to make investments now - whether it is with time, capital or resources - to ensure they are well positioned for the long-term.

Work with an advisor educated on impact investing to help you create a custom strategy that meets your needs. For more information on impact investing, check out our related posts, such as Impact Investing: The Lingo and Impact Investing: The Myths.

If you're clear on what you want to achieve but not clear on how to implement, our ESG Investment Managers can help whether you are in Memphis, San Diego, or beyond.

The companies and investments listed are for illustrative purposes only and are not recommendations by Planning Within Reach, LLC. Conduct thorough due diligence before making any investment decisions and remember that past performance is not indicative of future results. No investment is without risk, including the loss of principal.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.