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Not Your Parent’s Socially Responsible Investing Strategy

Posted by William S. Patzer, CFA

The 3 Key Trends Creating An Inflection Point in Impact Investing Today

Innovation can be a breathtaking engine of creation, and the rapid evolution of the options for implementing values-based investing offers a great example. Twenty years ago, a determined investor could pursue so-called Socially Responsible Investing (SRI), but implementation was difficult, the choices were quite limited, and investors expected to give up something in terms of performance. Today, SRI, now known more broadly as “impact investing,” encompasses a tremendous variety of investment options and implementation approaches, which contrasts sharply with what investors could have done 10-20 years ago. As we will see, the dramatic growth in possibilities stems from the confluence of several independent trends:

These trends have dramatically improved individuals’ abilities to give expression to a heightened desire to better the planet. This desire came along with (or perhaps because of) a greater awareness of the impact of corporate and individual activity on the world. Due to the developments noted above, we stand at an inflection point for investors who want to align their values and their investing. 

So, what has changed and why should values-oriented investors find that exciting?

More Data Means More Granular Information

First, impact investing benefits materially from the ubiquity of data. Data of all types has exploded with the advent and growth of the internet: witness the appliances like Alexa or Echo that exist to satisfy the urge to know the answer. People now assume the information is available somewhere on the internet.  Moreover, we live in an increasingly transparent age, which can be both beneficial and detrimental in some regards. Taken together, the qualities of ubiquity and transparency enable investors to peruse granular data on the activities and policies of companies. Entrepreneurs have taken advantage of the explosion of data to create numerous services that do the legwork of collecting and analyzing impact data. This innovation has provided investors with a newfound ability to triangulate on the specific data of interest to them, which in turn enables investing frameworks customized to their values and passions.  Even so, investors still need to harness the profusion of data, as the sheer volume can be overwhelming.

Measuring and Monitoring Investments Has Never Been Easier

Second, while more data is essential, investors must have some way to filter, collate, analyze, and present that data; new software represents the solution. Sophisticated software and algorithms constitute the missing link enabling investors to turn the data into an investment framework. With a framework created, software can then assist in constructing portfolios and help investors monitor their investment managers’ adherence to their own values. This monitoring includes measuring and assessing the impact of the investments they make according to their personal values lens.

Measuring and monitoring the impact of one’s investments is the most exciting development in impact investing over the last couple of years. The measurement, in turn, increases an investor’s level of engagement with impact investing, even as it facilitates further refinement, a cycle that will recur over an investor’s lifetime. Indeed, the ability to measure and refine underscores one of the key pieces of advice we give to our wealthy clients regarding impact investing: Don’t let the perfect be the enemy of the good. The newfound ease with which you can monitor and refine, perhaps by incorporating new data sources, means the most crucial step is getting started; you can always revise as you go. You need not wait for the perfect strategy or set of exposures to begin affecting the world for the better through your investments.

Lower Transaction Costs, Greater Opportunity

The third and final piece of the puzzle to fall into place was lower transaction costs for investors, epitomized in the (seeming) race toward zero in the cost to trade stocks. While numerous fund managers now offer impact-oriented investment strategies, the strategies conform to each manager’s preferred values. Investors for the most part cannot tailor these strategies to their own unique set of values and preferences. Separately-managed accounts (SMAs) can address this issue, but the need to hold and trade hundreds of securities previously made trading costs onerous for all but the largest clients. Impact investors want the ability to tune their investments down to the level of individual companies, and now can do so very cost-effectively. The decline in trading costs makes portfolios of stocks customized to personal values potentially one of the next big growth areas in investing.  Moreover, when combined with the tax minimization tactics uniquely possible through SMAs, investors not only can align their investments with their core values, but they can track the pre-tax return of the index, and do so with tax benefits that give them the potential to outperform the index on an after-tax basis.

Investors desiring to make an impact on the world have a much deeper and richer set of options than just a few years ago, much less a generation ago. The convergence of three trends has made this newfound panoply of approaches to impact investing possible:

Even so, investors should pursue this new world of possibilities and potential through a sophisticated advisor experienced in implementing impact investing for clients. It requires judgment to weigh the various options and then incorporate them into an existing portfolio, all the while maintaining fidelity to one’s long-term goals. Investors should view impact investing as a journey, and having an experienced guide can help you benefit from all the new developments and capabilities. Indeed, impact investing is not your parents’ SRI, and the world is better for it.