Tuesday, September 18, 2018
Can your investments do more than provide for your retirement? Is it possible to make a positive impact in the world while still earning market rates of return? These questions are at the core of a growing movement in the investment world known as impact investing.
By Brian Tall
Though it is known by many names (socially responsible investing, sustainable investing, and ethical investing, to name a few), the underlying premise is the same: If we harness the power of the capital markets and embrace a common mission, we can invest both for profit and for a positive societal impact.
Stated another way, impact investing focuses on what John Elkington coined in 1994 as the triple bottom line–a result that is good for people (social responsibility), planet (environmental responsibility) and profit (expecting compensation for putting capital at risk).
Nomenclature aside, we think it is helpful to retrace history to provide better context for where impact investing stands today. The origins of investing through the lens of social or environmental factors can be traced back to biblical times. The Jewish concept of Tzedek, which means justice and equality, comprises rules to correct imbalances that humans cause. According to Jewish tradition, property ownership carries rights and responsibilities, one of which is to prevent immediate and potential harm.
In the modern era, socially responsible investing evolved throughout the 1960s, 70s, and 80s, focusing on issues from labor and civil rights to the Vietnam War and apartheid in South Africa.
In North America, the first concrete examples of socially responsible investing emerged in the 18th century. In colonial times, Quaker and Methodist immigrants brought with them the concept of values-based investing exercised by their refusal to participate in the slave trade or profit from war. In the 1700s, Methodist reverend John Wesley outlined his basic tenets of social investing—including not to harm your neighbor through your business practices and to avoid industries that carry the potential to harm the health of workers.
In the modern era, socially responsible investing evolved further during the 1960s. During this time, investors with social concerns increasingly sought to address equality for women, civil rights and labor issues. In the 1970s, outrage against the use of chemical weapons in Vietnam prompted protests of Dow Chemical and other companies profiting from the war. From the 1970s to the early 1990s, large institutions avoided investment in South Africa under apartheid, with the resulting negative flow of investment ultimately forcing a group of businesses, representing 75 percent of South African employers, to draft a charter calling for an end to apartheid.
Since the late 1990s, investors seeking impact have become increasingly focused on environmental and sustainability issues, with a strong focus on global climate change. Many investors have sought to engage with companies blamed for contributing to climate change, while others have chosen to divest from the worst offenders, with the hope that reduced capital flow will pressure these companies to reform. In 2007, the Rockefeller Foundation’s board met and coined the phrase “impact investing.” Antony Bugg-Levine, a managing director of the Foundation, is credited with coining this term and has the following to say about this movement:
“…we describe the ‘bifurcated world’ that most people inhabit, in which they assume that the only way to solve social challenges is through government and charity, and that the sole purpose of business and investing is to make money. Impact investors reject that worldview. [Impact investors] recognize that for-profit investment can be both a morally legitimate and economically effective way to address social and environmental challenges.”
The premise may be simple (i.e., profit and purpose can co-exist), but how does one implement such a strategy? What are the practical realities of impact investing? Are market rates of return really possible? These are important questions that we have sought to better understand and will address below.
Brighton Jones Impact Portfolios
For clients and investors seeking an impact-oriented investment solution, we are excited to introduce Brighton Jones Impact Portfolios—an investment framework that seeks to capture the essence of “people, planet, and profit” while still adhering to our portfolio construction process and academically-grounded investment philosophy.
So, what does this look like? It begins with the same rigorous approach we take with our standard portfolios. For each client, we measure the appropriate level of risk to be taken, establish the right asset allocation policy, effectively diversify across different asset types and regions, and optimize the use of tax-advantaged accounts. The only difference between our standard investment approach and impact offering is in the final step of our portfolio construction process: the selection of investment managers.
The real power of public securities investing is the engagement shareholders can have directly with the companies in which they are invested.
When it comes to selecting investment managers, we believe investors are best served with low-cost, tax-efficient, broadly diversified solutions managed by shareholder-friendly firms. For our impact offering, we extend our search criteria to identify managers who incorporate what are known as ESG factors (environmental, social and governance) in the selection and weighting of securities. Within each investment strategy, those companies that have higher ESG scores are over-weighted, and those with lower scores are typically under-weighted or excluded altogether.
The security selection criteria of our investment managers are only one part of the impact equation, however. The inclusion or exclusion of securities based on ESG and other factors is important, but the managers (and therefore the investors) wield much more power than simple selection exercises. The real power of public securities investing, in our view, is the engagement shareholders can have directly with the companies in which they are invested. We have specifically selected managers with a long and proven track record of shareholder engagement in the areas of environmental sustainability, human rights, corporate governance, and other ESG categories. And the results of their engagement speak for themselves.
All of the managers we have selected can cite a litany of shareholder resolutions or other forms of engagement that have had a direct impact on corporate behavior (everything from better environmental stewardship to improved working conditions and child labor policies). By investing with these managers, the investor joins forces with other like-minded investors, and the billions of dollars these investors wield have great power to effect change. When we spoke of the power of capital markets to move the “impact needle,” this is a prime example.
If you have any questions about Brighton Jones Impact Portfolios, please don’t hesitate to contact us.
Brian Tall serves as the chief investment officer at Brighton Jones.
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