Impact Investing
The responsive investment approach depends on the investors’ level of intentionality, ranging from exclusionary screens on the low end of the spectrum to targeted impact investments on the high end.
Common Misconception
There is a common misconception that an individual or an institution can only make significant societal impact through grantmaking, while an investment portfolio is solely engineered to maximize returns. However, impact investing seeks to combine the goals of both the heart (giving) and the head (generating returns). An impact investment is not a grant, which ensures a 100% loss of capital, but instead is a way to invest with the expectation of generating a positive return while also “doing good”. Positive portfolio growth means that an increasing amount of capital can be allocated to causes which are most important to an individual or institution. Impact investing strategies can target many different issues (environment, affordable housing, education, etc.) and can cover many different structures (equities, fixed income, private investments, etc.), providing the opportunity to construct a well-diversified impact investment portfolio. Oftentimes, the term “impact investing” is used to cover other strategies with similar motivations such as Socially Responsible Investing (SRI) and Environmental, Social and Governance (ESG).
INFINITE SHADES OF IMPACT INVESTING
Impact investments can be made in any part of this investment spectrum.
Understanding Impact Investing
Aligning investments with family values
It is possible for families to align their investment portfolios with their family values. There is a misconception that investors must be willing to sacrifice financial returns to pursue investments that generate a positive social and/or environmental impact. As things stand today, it is possible to make a positive impact with investment capital while still meeting financial goals. There are several approaches to aligning investment portfolios with family values: 1) socially responsible investing (SRI), 2) environmental, social, and governance investing (ESG) 3) Engagement, 4) Mission-Related Investment, 5) Program-Related Investment (PRI), and 6) Impact Investment.
What is SRI?
Socially Responsible Investment (SRI), also known as ethical and green investing, means avoiding industries that negatively affect the environment and its people. SRI screens out negative elements while focusing on financial return and social change that benefits employees, governments, and the general public. SRI frequently utilizes an exclusionary investment approach.
What is ESG?
Environmental, social, and governance (ESG) is an inclusionary investing approach. ESG is used by investors to evaluate corporate behavior and determine the future financial performance of companies. ESG factors are a subset of non-financial performance indicators, including sustainable, ethical, and corporate governance metrics. A company must promote ESG policies to be included within a portfolio. Companies with strong ESG attributes have performed favorably vs. non-ESG companies while also mitigating many operational and financial risks.
What is Engagement?
Engagement is a dialogue between investors and companies focused on positively influencing corporate behaviors to drive long-term, sustainable returns for investors. Engagement is achieved by leveraging shareholder rights from public investments to advance the organization’s mission and values through company meetings, written communication, shareholder proposals, and proxy voting.
What is MRI?
Mission-Related Investments (MRIs) are market-rate investments that support the Foundation's mission by generating a positive social or environmental impact while generating reasonable competitive rates of financial returns. MRIs are made from a Foundation's investment assets rather than program assets.
What is PRI?
Program Related Investments (PRIs) are made primarily to achieve a program objective rather than a significant return. These are a mission-aligned investment that acts as a component of an organization’s grant-making.
What is Impact Investment?
Impact investing is identified by three key factors: intentionality, a goal of positive societal improvement, and an expectation of repayment of the investment plus a return on the investment. Impact investing can take many forms, like opening a checking account at a local credit union. The credit union would, in turn, use those dollars to lend to local members who could have an impact in the community. Impact investments explicitly seek out investing in something the investor likes rather than divesting from something disliked. Impact investments exist in all asset classes, sectors, and regions with various ranges of expected returns. Options for impact investing can range from investments designed to address the local community's needs to supporting global strategies designed to target global social and environmental issues.
JFG Solutions
Johnson Financial Group’s evaluation of SRI, ESG and impact investment managers considers the United Nations Principles for Responsible Investment, a set of six principles creating a standard for responsible investment related to environmental, social and corporate governance. We track nearly 1,000 managers within the SRI, ESG and impact universe and can create customized investment portfolios that completely align with the family’s risk/ return objectives, stated family values and UN PRI.