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Impact Investing: Matching Money with Principles

As consumers have increasingly seek to match their investments with their morals, values, and religious beliefs, sustainable, responsible, and impact investing has surged in popularity.

 In 2016 alone, more than $8.7 trillion were invested in socially responsible funds that use a variety of environmental, social, and governance (ESG) metrics in selecting a portfolio that operates in accordance with the beliefs of socially conscious investors. To put that increase into context, a total of $40.3 trillion was under professional management in 2016, which means ESG based portfolios made up more than 20% of all total assets under management, up from $2.6 trillion in 2015 and a mere $202 billion in 2007. Such phenomenal growth has been driven by client demand, and investment managers have responded with many different fund offerings featuring a diversity of assets including mutual funds, variable annuities, ETFs (exchange-traded funds), closed-end funds and other alternatives.

ESG investing takes 3 main forms, which can be alone or combined together.

  • Excluding or under-valuing companies that produce harmful goods or that have controversial or unsustainable practices

  • Assigning a bigger weight to companies that do some sort of social good or score high on ESG metrics

  • Taking active steps to engage with the management of companies to persuade to adopt for socially conscious practices

The issues investors care about range from environmental concerns to the ethics of profiting from conflict zones or repressive states that violate human rights to gender diversity and representation in the workplace to even organic foods and healthier eating. ESG investments not only attract strongly principled investors but also value investors who believe that in the long term they will end up with a higher return. Many studies have shown that investment portfolios that include companies with high ESG metrics tend to outperform portfolios assembled using only conventional financial analysis over the long term.