I am fortunate to work in the growing field of sustainable and impact investing, which has been getting an increasing amount of attention. There are announcements on a near-daily basis from organizations and institutions thinking about how to shift or re-examine their investments with a values lens.
But what I’ve noticed is that access to and awareness of these new products is rarely trickling down from Wall Street to Main Street. Most “everyday” people, like you and me, are not thinking about the impact of our savings or retirement accounts.We either don’t believe that we have enough money to make a difference, are unaware of the many new ways to invest, or let our financial advisors make all of the decisions for us. In our age of transparency, technology, and financial innovation, we do not have to settle for this old norm.
I was in the “I don’t have enough money to matter” camp. Until recently, I would talk to friends and family about this wonderful field of impact investing but I had not taken the time to examine what was in my savings and retirement accounts. When I did, I quickly realized I needed to practice what I preach. Over the last year, I have interrogated my personal finances with my financial advisor and together we have crafted a portfolio that better reflects my values.
What follows are some experiences from our journey to shift my modest savings into a diversified portfolio of investments in companies and organizations that I believe in.
A framework for diversified impact
There are many conversations in our industry about how to categorize or segment the impact and sustainable investment marketplace given its growth and the growing confusion around definitions and metrics. There are ongoing efforts by wonderful organizations like the Global Impact Investing Network and segmentation suggestions by knowledgeable long-time practitioners like Brian Trelstad at Bridges Ventures.
For my portfolio, we tried to simplify the impact segmentation into a three by three matrix similar to Morningstar’s style box used for stocks and bonds. This “values box” is meant to act as an additional criteria — complementary to the traditional considerations of risk, return, diversification, and time horizon. It isn’t perfect, but has helped me ensure that my investments are financially and socially diversified.
The Y-axis of the values box (shown below) is the investment approach, or the mechanism for how to invest. “Direct impact” is an investment, either debt or equity, into a company or organization with a social or environmental mission. “Diversified impact” is an investment, either debt or equity, into a diversified product or pool of assets that are directly generating social or environmental good. “Screened” is placing a social or environmental screen on investments, either screening things out like Socially Responsible Investment (SRI) funds that eliminate industries like tobacco, and oil, or screening things in like Environmental Social and Governance (ESG) funds which only choose companies that fit their stated ESG criteria.
The X-axis of the values box is the extent to which the organization can or will measure their social or environmental impact. “Measurable” impact includes companies with a deep social mission that collect, analyze, and report on their impact just as they report on their financial performance. “Not measurable” includes organizations that consider and incorporate impact but don’t actively measure or report on it.
*This is a snapshot of my current portfolio and does not constitute solicitation or an intention to sell securities. Thank you for keeping us honest, lawyers.
As of today, I have investments that fall into seven of the nine spaces on the values box.
- Screened, not measurable (top left): This includes all of my ESG funds, which are small, medium, and large cap equity funds across the growth to value spectrum. For each of these funds, I looked at the funds’ top holdings to ensure that the companies that fit the manager’s criteria were companies that I felt comfortable owning. Based on my own values judgement, I try not to have any exposure to large financial institutions, large pharmaceutical companies, or companies that I do not believe are contributing to the health and wellness of their communities.
- Screened, moderately measurable (top middle): This includes mutual funds with a more explicit social or environmental mission with the potential to measure impact. Right now, I only have one fund in this category that invests in small and mid-cap clean energy companies.
- Indirect, not measurable (middle left): This includes municipal bonds and tax-free bond funds. These investments are typically for critical public infrastructure projects, but I do not have full transparency or ability to decide where these investments are being made, and for what purpose. This may change as new groups like Neighbor.ly come to market, which would allow these investments to shift right.
- Indirect, moderately measurable (middle middle): This category has interesting new entrants indirectly investing in community benefit. I am invested in the Access Capital Community Investment Fund, which buys debt instruments on the secondary market supporting affordable housing and community development. I am also a (very small) StreetSharesinvestor, which is an online platform that provides access to capital for veteran-owned businesses. I made both of these investments to learn more about new products seeking to support underbanked communities in the US. Their level of measurement and reporting on this impact, however, is currently limited.
- Indirect, measurable (middle right): This includes my favorite product (full disclosure, I work at Calvert Foundation, the issuer, so I am completely biased), the Community Investment Note®. The Note invests in intermediaries and funds originating loans in underserved, low-income communities in the US and around the world. It is a diversified product that provides exposure to everything from climate change mitigation to affordable health clinics in Sub Saharan Africa to flexible and affordable capital for minority and women owned businesses. Calvert Foundation collects and reports on the impact of these investments on an annual basis. I am able to target my Note, so mine supports community and economic development projects in Baltimore, my pseudo-hometown.
- Direct, not measurable (bottom left): This includes the stocks and bonds of individual, public companies that I want to support. Right now, this includes a green bond issued by Apple that they will use to finance clean energy, energy storage, and energy efficiency projects across their global operations. I also purchased CVS Health common stock after they announced they were no longer selling cigarettes and Aetna when their CEO announced that he would increase the wages of his lowest wage workers. This category allows me to reward values-aligned decision making of corporate leaders.
- Direct, moderately measurable (bottom middle): This is a category that I am hoping to build in the coming year to include direct investments in companies or projects where I can see social benefit, even if it is not perfectly measured. Right now, I have an investment in real estate projects through Fundrise, a crowd-sourced real estate platform. Because I can’t pick the projects directly, there are likely some that I am more excited to support than others (charter school construction versus luxury condominiums), but I am looking at this as another learning investment.
The two boxes that are currently empty are the screened, measurable (top right) box and the direct, measurable (bottom right) one. The former will likely have to come with the industry’s maturation as ESG funds are able to report on the social or environmental impact of the companies they hold. The latter I am hoping to build, over time, through a potential small portfolio of angel investments in early stage companies with innovative, mission-driven business models.
Disclaimers and admissions
First, and importantly, I am fortunate to have the time and attention of a fantastic financial advisor (she also happens to be my mother) who has been nothing but patient and supportive throughout this process, despite the fact that I am not one of her big clients. @@Many advisors may not understand these new products@@ and thus don’t explore the myriad of options available outside of the asset allocation frameworks they know and love. I also understand that, because this is my profession, I have exposure to new products and strategies for investing in good and pay close attention to the industry and its evolution.
Despite these advantages, @@the barriers to investing for social good are as low as they have ever been@@ and will only be lowered in the coming years. I am a strong believer that the behavioral change of individual, small dollar investors will be the force that shifts our global capital markets from the pursuit of profit at any cost to the pursuit of transparent value creation across global communities. If only a third of the country shifted $20,000 in savings into products aligned with their values, we would move $2 trillion. We — all of us — have a role to play to make this happen.
So do me a favor. Take a look at your investments and see what you own. Are they companies you believe in?
Contributed by @bethbaff