Would you be willing to spend more money on so-called “greener” groceries? Most people would: Nearly two-thirds of US consumers say they are happy to pay more for products that have a more positive environmental impact.1 The decisions you make in the supermarket aisles probably reflect your values to some extent, whether that’s buying organic, locally produced, meat-free, or low-packaging products.
But what about when you invest in a company that shares your values? Are you really making a difference, or are you just soothing your conscience?
“As an investor, you’re essentially voting for a company when you invest in it or divest from it, and your investment choices matter.”
Impact investing does make a difference. The numbers show it is no longer just a fringe movement. Impact investing, which can also be thought of as socially responsible investing, is a tidal wave2 that company boards can no longer ignore: These assets may make up one-third of all money invested globally by 2025.3
But what can impact investing really achieve? Here are five ways I believe impact investing is driving positive change.
Impact Investing Creates a Financial Incentive
When more people buy a stock, it increases the stock’s price. Corporate leaders love a high stock price, as it signals that their company is in good health. So, as an investor, you’re essentially voting for a company when you invest in it or divest from it. In other words, your investment choices matter. Sustainable investing means using your investment dollars to influence the path of a corporation.
Increasing pressure from shareholders4 is also driving more companies to explore and embrace better environmental, social, and governance (ESG) practices and socially responsible policies. These can include setting environmental or social goals and mitigating negative impacts.
The Message Can Be Heard Beyond Companies' Walls
Every major company sits at the center of an ecosystem of stakeholders—not only employees, customers, and shareholders, but also vendors, suppliers, distributors, and the communities in which they all operate. Positive corporate actions can have a ripple effect. That’s especially true for large multinational companies with supply chains that reach deep into the developing world. When these companies make good choices5—like helping to improve working conditions or reducing pollution at factories—then the impact is truly global.6
CSR Is Reshaping Reputations
The corporate social responsibility (CSR) movement has spawned a plethora of groups dedicated to helping stakeholders find the most responsible companies. Many companies actively seek the approval of these groups because it increases their appeal to sophisticated customers and top talent.
Financial firms have also developed stock indexes focused on best-in-class responsible companies, like the Dow Jones Sustainability Index. I’ve seen companies work hard to get onto these indexes because mutual funds and exchange-traded funds based on them must buy their shares. Companies that fail to get onto these indexes —or that get screened out by the hundreds of investment funds and screening tools available to impact investors—will see demand for their shares decline.
The Cost of Green Projects Goes Down
Investors can favor the bonds as well as the stocks of responsible companies. Bonds provide a direct way of funding a responsible company’s projects. Responsible companies need capital for renewable energy and energy efficiency projects to help them reach their carbon-reduction goals. Green bonds are a fast-growing avenue to raise capital for such projects.7 Some green bonds, such as those issued for municipal or redevelopment projects, also may produce tax-exempt income.
Multiple studies8 have also shown that companies that score high on sustainability rankings have a lower “cost of capital”—that is, they pay less to raise money through issuing bonds or selling stock.9 The market appears to believe these companies carry lower long-term risks due to their governance policies.
Impact Investing Challenges Companies to Do Better
Anyone who buys a share of a public company has the right to vote on resolutions discussed at annual shareholder meetings. Many of these resolutions relate to sustainability issues such as climate change, diversity, human rights, or pay equity. In recent years, the average shareholder support for resolutions addressing environmental and social issues has risen significantly, according to Morningstar. This suggests more shareholders are taking sustainability seriously.10
If you own company shares directly, you can cast your own vote on these resolutions by attending the annual meeting or via proxy forms. If you own shares through a mutual fund, then your fund manager votes for you. Some (but not necessarily all) managers of impact investing funds take strong stands on social and environmental issues through proxy voting. These votes have a big impact because managers control many shares. JPMorgan notes that ESG has been a strong theme in recent proxy seasons, with activist investors increasingly willing to call out companies’ shortcomings on environmental, social, and governance issues.11 Consider checking the fund manager’s proxy voting policies and records before buying a fund.
Most shareholder resolutions don’t win a majority of votes, but they sometimes spur corporate action, even if the resolution never comes to a vote. In my experience, next to socially responsible investing by buying shares or bonds, proxy voting is the most direct way investors can push good companies to be better.
1. YouGov, Global: Consumer Willingness to Pay for Environmentally Friendly Products (Apr 2021)
2. Blackrock, Larry Fink 2021 letter to CEOs (2021)
3. Bloomberg, ESG Assets May Hit $53 Trillion by 2025, a Third of Global AUM (Feb 2021)
4. Reuters, Shareholder Activism and ESG: What Comes Next, and How to Prepare (June 2021)
5. Corporate Knights, The 2021 Global 100: How the World’s Most Sustainable Companies Outperform (Jan 2021)
6. World Economic Forum, Charting the course for SDG financing in the decade of delivery (Jan 2020)
7. FT.com, Analysts Expect as Much as $500bn of Green Bonds in Bumper 2021 (Jan 2021)
8. University of Oxford and Arabesque Partners, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Performance.
9. MSCI, ESG and the Cost of Capital (Feb 2020)
10. Morningstar, Hints of Sea Change in Big Fund Company ESG Proxy Votes (May 2021)
11. JPMorgan, 2020 Proxy Season Report (2020)
Impact investing focuses on investments in companies that relate to certain sustainable development themes beyond traditional financial factors and demonstrate adherence to environmental, social and governance (ESG) practices. Therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market.
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