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Impact, Environmental Social Governance (ESG), Sustainable Investing, what is it and how has it evolved?

The origins of Impact investing began with a desire to invest with purpose. When people hear about progressively-minded corporations, they think about solar panels, wind power and Fair Trade types. These are valid, but it’s broader than that. One should also think about timber companies that don’t just bulldoze and harvest timber but do so in sections that get replanted as they go to keep this land sustainable. Another example is investing in eye-care clinics in India that may be too burdensome and less profitable for a major hospital but provide the local community with essential care. You may also have heard the term microfinance. This is the idea of lending money to entrepreneurs with very short-term goals and for a relatively small amount of money. A well-known example is loaning funds to a family to purchase a few livestock to feed their family and to also sell eggs, milk and cheese to locals.

Can the average investor participate in Impact in this form?

These are all wonderful ideas, but for the average investor, it may not be recommended. Investing in some of these businesses requires capital that will be tied up for years and may be difficult to sell, creating an illiquidity for the investment that the average investor may need. These types of investments are concentrated in a few industries and may not provide the diversification for a reasonable return/risk profile. Many of these companies require significant funds to get them off the ground and many of them fail. This makes it prohibitively risky for the average investor. For all of these reasons, historically, this type of investing was typically done in the private equity, venture capital and institutional world. Who else got involved to push Impact to a broader audience?

Who else got involved to push Impact to a broader audience?

Impact’s next evolution started with the questioning of particular investments in portfolios of endowments, foundations and pension funds asking why their constituents’ funds should invest in companies related to gambling, alcohol, tobacco and weapons manufacturing. The solution was to screen out for these types of companies and not include them in the investable assets of these portfolios. As you can imagine, these screens got bigger and more refined to be tailored to the individual organization and its mission.

What does Impact investing look like today?
Growth in ESG Assets
Growth in ESG Assets

Today, Impact investing has expanded to reach the broader investor and allow them to not just utilize exclusionary screens, but also screen positively for diversity, equal pay, carbon emissions, and others. The portfolios we see today aren’t just a handful of companies in concentrated industries, but more of an overlay of a broadly diversified portfolio. This overlay takes a universe of stocks, breaks down what the manager’s preferences are for weights in different asset classes and/or sectors and then screens the companies in those classes or sectors for the companies that screen best for the factors mentioned above. What you end up with is a portfolio of stocks that are doing better than their peers when it comes to social, environmental and corporate governance heuristics. What this helps achieve or solve is having a socially responsible portfolio of stocks with the added benefit of diversification and more predictable risk and return profile.

The growth in this space is staggering. Impact investing is one, if not the fastest, accumulator of assets for a style of investing. Forbes estimates that $228 billion of AUM is Impact related and has doubled in the last year. Many mutual funds and ETFs offer Impact investing but charge higher fees for the added management needed. Many of them do not use the rigorous and customized screening that BakerAvenue utilizes. We do this with no additional fees. It is part of the high level of service our clients expect.

If you would like to learn more, contact us to discuss Impact / ESG portfolios that can offer competitive returns while making the world a better place, one investment at a time.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Baker Avenue Asset Management LP. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. All information is believed to be factual and up-to-date as of this writing and is subject to change. Before purchasing any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of any investment.

Any suggestion of cause and effect or of the predictability of economic or investment cycles is unintentional. Past performance is never a guarantee of future performance. Baker Avenue Asset Management LP may currently own or have previously owned a specific stock or company referenced, and a list of our past holdings can be found at the SEC website. Click to view full disclosures.