Are your Investments Aligned with your Organization’s Mission and Values?

Norman Nabhan, CIMA

Many believe that Impact and Sustainable Investing is a niche in the investment industry reserved for religious, environmental and social impact foundations.  There is also a perspective that “Impact Investing” involves sacrificing investment returns to “do good” and become a “socially conscious” investor.  The fact is that neither of those presumptions is true and that Impact Investing is rapidly going mainstream.

According to the US SIF 2016 survey in the U.S., sustainable and impact investing continues to gain traction with total assets at the beginning of 2016 at $ 8.7 Trillion, up 33% from $6.6 Trillion in 2014, across strategies employing different approaches such as negative screening, ESG integration and corporate engagement/shareholder action.  The vast majority of these assets are held by institutions, however, there is a growing demand by individual investors in this space. (1)  In a recent survey by Morgan Stanley’s Institute for Responsible Investing it found that 84% of Millennials are interested in Socially Responsible Investing.   At a Macro level, institutional asset managers are increasingly integrating ESG considerations into their core investment disciplines and process even if they do not consider themselves to be “Impact Managers”.  At a Micro level, we are seeing very specific investment products created for investor access to these themes.  As of 2016 there were $3.3 Billion in assets in newly created ETF’s focused on the environment.  In addition, investors are now more actively engaging in Investor Advocacy by engaging with corporate management on ESG issues.  From 2014 to 2016, 176 institutional investors and 49 money managers filed shareholder resolutions on ESG issues.  In addition, 57 institutional asset owners reported that they engaged in dialogue with companies on ESG issues, as did 61 money managers. (2)

To properly explore Impact Investing it is important to understand that this is not a new thing or Wall Street fad.  The history goes back quite a way.  In 1898, the Quaker Friends Fiduciary Corporation was founded and it adopted a policy of making no investments in weapons manufacturers, alcohol or tobacco companies, a position that was consistent with the beliefs and values of the Quakers.  The number of adopters of such policies that are consistent with their faith or values has evolved and compounded over the years.  According to the Morgan Stanley Institute for Sustainable Investing, today, one of every $6 dollars invested in the U.S. has some type of mission alignment. (3)   That alignment may be with faith based values such as birth control or alcohol use, but as of late it may be less exclusionary and more proactive to search for investments that have a positive impact on any number of values such as, climate change, corporate governance, or social concerns like diversity, or sustainability.

As to the commonly accepted idea, that to embrace a socially conscious or “Impact Investing” strategy, you must give up investment returns, today there is ample evidence that is not necessarily the case either.

Let’s explore these assumptions in greater detail and look at both, the evolution of Impact Investing and the increasing numbers of investment options that can provide highly competitive returns.

In 1977 the first Socially Responsible investment fund was founded that sought to invest in companies with attributes that would contribute to positive social change.  That same year, largely lead by Catholic Women’s Organizations, the Sullivan Principles of Action and Divestment were announced to curtail investments in South Africa in an attempt to influence the government to end Apartheid. While this was a long and protracted effort, the embargo on investments in South Africa is clearly credited with helping to bring an end to the policy.

In the 1970’s and 1980’s, it was common to see Investment Policy Statements for religious or healthcare organizations that would specifically exclude certain investments that were not consistent with their missions such as investments in alcohol or tobacco manufacturers or drug companies producing birth control devices.  Investment Policy Statements were written to specifically prohibit asset managers from making those investments and consulting firms developed technology to prevent those types of purchases and to monitor compliance with investment policy.  Today, in my experience, it is far more common to see investment policy statements drafted to attempt to align an organization’s investments with some consistency with the organization’s mission and values.

We are now seeing fixed income managers that will invest in “Green Bonds” that finance schools and playgrounds in certain communities or mortgage-backed bonds that provide mortgages for low and middle income housing and will allow investors to target which bonds will go into their portfolios.   A community foundation, healthcare foundation, or any other social impact foundation may want some of its fixed income portfolio to provide mortgages specifically in in their community for low and middle income living projects, healthcare facilities or bonds for local schools or parks.  If having an impact in their local community is part of their mission statement, then having a mission alignment with their investments makes sense to target their own back yard.  Most foundations give grants each year of 4% to 5% of their portfolio value to have an impact on carrying out their specific mission.  There is a growing sense that using the larger 95% of their portfolio to create impact can also be consistent with further driving their mission.  Being able to steer those fixed income investments to be targeted to their own communities is a way to utilize a larger percentage of their portfolio to further their Mission related success.

While negative screening has been with us for many years, for we are now seeing well established asset management firms develop faith-based portfolios that are specifically invested in alignment with Catholic Values or Baptist Values.   In examining the Informa Database of investment manager returns, we see the emergence of equity asset managers with solid and competitive track records that invest in companies that they believe will have superior investment returns because they have strong Environmental, Social and Governance (ESG) characteristics.    Many of the asset management firms that screen investments for strong Environmental, Social and Governance (ESG) characteristics have begun to go further.  Many have become activist investors filing shareholder resolutions to promote stronger values toward sustainability, diversity in their workforce and on their governing boards, and other social issues.  This activity often forces corporate boards and senior management to have an active debate on these issues before they become controversial issues at shareholder’s meetings.  In many cases, managers and board leadership have opted to make the requested changes before they go to a shareholder vote.  The growing interest by investors in finding companies that have strong ESG guidance is allowing institutional investors to set the “bar” at a higher level on diversity, sustainability and corporate governance.

While this is definitely not a new trend, it has clearly gaining significant traction in the past decade. Women and Millennials are two times more likely to embrace some type of Impact Investing solution. (4)  In the past several years, I have rarely attended a Foundation conference where the Impact Investing sessions were not given to a packed room due to the growing interest.

Like most things, as a trend develops and interest in something builds, more solution providers come to the fore to meet the demand.  While, in the past, Impact or Socially Responsible investing may have been a niche with a few asset management firms providing solutions, today, a large number of highly experienced firms with a strong investment methodology and long track records are providing investment solutions.  The 2016 U.S. SIF report stated that there were 925 distinct asset management funds representing $7.79 Trillion in assets that incorporated Environmental, Social and Governance criteria into their stock or bond selection process. (5)  In additional to many asset management firms with specific ESG focused or values alignment portfolios, we are also seeing a proliferation of investment vehicles such as ETF’s that target very specific strategies like Low Carbon investments, Global Water supplies, Gender Diversity and Environmental issues such as energy, clean water, waste treatment, recycling and sustainable food supplies.  An example is that Philippe Cousteau Jr, the Grandson of famous diver Jacques Cousteau has created an ETF  that invests in efficient energy, women’s and children’s issues and renewable energy.  In a unique twist to Impact Investing, a part of the management fee goes to the Earth Echo Foundation, his charity that is devoted to Ocean Conservation and Restoration.

There is plenty of evidence to show that ESG can enhance investment Performance.  A 2014 report by the University of Oxford and Arabesque Partners (“From Stockholder to Stakeholder: How Sustainability Can Drive Financial Outperformance,” September 2014) analyzed over 190 academic studies and sources on sustainability to assess how sustainable corporate practices can affect investment returns.  It concluded that “88% of the research shows that solid ESG practices result in better operational performance of firms and 80% of the studies show that stock price performance of companies is positively influenced by good sustainability practices.

In 1990, the Domini Social Index was created (now the MSCI KLD 400 Social Index Index) to serve as a measurement benchmark for Socially Responsible Investing. The MSCI KLD 400 Social Index is a capitalization weighted index of 400 U.S. securities exposure to companies with outstanding Environmental, Social and Governance ratings and excludes companies whose products have negative social or environmental impacts.  Since 1990, the KLD 400 Social Index has outperformed the S&P 500 index.  According to Morgan Stanley’s Institute for Sustainable Investing, the KLD 400 Social index had a return from 1990 to the end of 2014 of 10.14% versus the S&P 500 over the same time frame of 9.69%. (6)   It may make sense that companies that are paying attention to diversity, sustainability and the impact that they have on their environment through safety, training, recycling and “best practices” should have less risk of destabilizing events that could cause “Headline Risk”.  Environmentally friendly practices at corporations have been discussed for a long time.  Researchers now say with a high degree of confidence eco-efficiency relates positively to operating performance and market value.(7)  The work clarifies that “although environmental leaders may not sell at a premium relative to laggards, the valuation differential increased significantly over time”  We are seeing companies take this to heart, for example, makers of consumer products concerned over limited water resources and the role that products such as shampoo may play in the overuse  of these resources, work to educate their customers on the issue and also employ technology in their manufacturing process to better manage water use.  This has been supported by some studies that have shown that companies with high ratings for Environmental, Social and Governance (ESG) have lower costs of capital and lower risk of default. (8)  This can lead to an improvement in the risk/reward characteristics of a portfolio.

There are now a number of Alternative Investment opportunities that have begun to focus on Impact and ESG criteria in guiding their investment strategies to round out the asset allocation strategy for institutions.  Hedge funds and private equity funds are providing access to investors to provide returns with a lower correlation to the equity markets and to also have a positive impact on their targeted investment areas such as job creation, food production and distribution and education in the emerging markets.  Both the asset managers and the consultants that track them are developing impact reports that not only report the financial returns to investors, but also the impact that the investments have had in the targeted communities.  Of course, alternative investments and private equity interests may be highly illiquid, involve a high degree of risk and be subject to transfer restrictions.  These would be additional considerations for investors to consider.

Vision 2050: The New Agenda for Business, published by the World Business Council for Sustainable Development estimates that the business opportunities for sustainability-focused companies are expected to be are expected to be between $3 Trillion and $10 Trillion annually, or up to 4.5% of Global GDP.  Companies are improving their competitive position and returns by adjusting their business strategies to address long-term global themes and mega-trends including: Climate Change, Water Quality, Waste Management, Food Availability, Health and Wellness, Improving Lives and Ageing Populations. (9)
Clearly, asset management firms that can identify strong companies that are well-positioned to solve these societal problems may have the potential to deliver excellent returns.

An often asked question at Impact Investing presentations comes from Trustees and Board members that are concerned that they may be breaching their fiduciary duties by focusing on Impact Investing and not the achievement of the highest returns.  There is now ample evidence that investors may not be giving up returns, but to further give them comfort, the Department of Labor has weighed in to the debate.

In an announcement by Tom Perez, former U.S. Secretary of Labor on the subject, clarified the DOL’s view that “Environmental, Social and Governance (ESG) factors may be considered relevant to evaluating an investment’s economic merits.”  He stated that, “Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand.  We have heard from stakeholders that a 2008 department interpretation has unduly discouraged plan fiduciaries from considering economically targeted investments.  Changes in the financial markets since that time, particularly improved metrics and tools allowing for better analysis of investments, make this the right time for us to clarify our position.”  He further stated that, “as always, Fiduciaries should maintain sufficient records to demonstrate that they have complied with ERISA’s Fiduciary standards.”  While Foundations and Non-profits are not subject to ERISA, many of the court cases about non-profit fiduciaries have pointed to the tenets of ERISA for guidance

Investing with Impact has evolved and will continue to develop in the future, but it is rapidly moving into the mainstream. Leading competitive strategy guru Michael Porter, creator of “Five Competitive Forces” stating that he has begun to see a link between ESG integration and business success.  In the paper “Measuring Shared Value”, Michael Porter, et al, estimates that in excess of 3500 organizations in more than 60 countries use the Global Reporting Initiative’s GRI sustainability standards to report on ESG performance. (10)

As continued evidence builds that returns are competitive and as top tier investment management firms move into the space, the choices will become easier for trustees and investment committees.  If asset managers are successful in identifying companies that are solving the problems of the future, their returns should be highly competitive.  In my experience, we are seeing an evolution in Investment Policy Statements, where, in many cases, boards are dictating that given equal track records and past performance in their manager selection process, they will opt for asset management firms whose investment styles are aligned with the goals of their organization.

“I alone cannot change the world, but I can cast a stone across the waters to create many ripples”

-Mother Teresa

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  • US SIF Trends Report. The Forum for Sustainable and Responsible Investment November 2016
  • US SIF Trends Report.

3) Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals” February 2015

4) Report on the Sustainable and Responsible Investing Trends in the United States, 2016, USSIF Foundation, Nov 2016

5) Zephyr Analytics and “Report on the Sustainable and Responsible Investing Trends in the United States, 2016, USSIF Foundation

  • Morgan Stanley Institute for Sustainable Investing, Sustainable Reality”
  • Guenster, n., Bauer, R., Derwall, J and Koedijk, K., The Economic Value of Corporate Eco-Efficiency. European Financial Management , 2011
  • Bauer, Rob, and Hann, Daniel, “Corporate Environmental Management and Credit Risk”, European Center for Corporate Engagement, June 30, 2010
  • Morgan Stanley Research, Morgan Stanley Wealth Management Global Investment Committee
  • Porter, Michael, Hills, Greg, Pfitzer, Marc, Patscheke, Sonja, and Hawkins, Elizabeth, “Measuring Shared Value: How to Unlock Value by Linking Social and Business Results.” FSG 2012, fsg.orgThe S&P 500 Index is an unmanaged, market value-weighted Index of 5000 stocks generally representative of the broad stock market. An investment cannot be made directly into a market index.

The MSCI KLD 400 Social Index is a capitalization weighted index of 400 U.S. securities that provides exposure to companies with outstanding Environmental, Social and Governance (ESG) ratings and companies whose products have negative social or environmental impacts.

Norman  Nabhan CIMA® is a Managing Director and Institutional Consulting Director of Graystone Consulting the Institutional Consulting business of Morgan Stanley in Houston, Texas.  The information contained in this article is not intended to be a solicitation to purchase or sell investments.  Any information presented is general nature and not intended to provide individually tailored investment advice.  The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  Investing involves risks and there is always the potential of losing money when you invest.  The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.

  • Norman Nabhan, CIMA