Highlight / October 9, 2020

Getting The Most Out Of Impact Investments

In recent years, impact investment has seen a meteoric rise to prominence

From innovating the Indian dairy industry to scaling a Native American natural foods venture, companies with big hearts have changed how we look at the ‘bottom line.’

These projects aim to generate a positive social and environmental impact on top ofR financial returns. 

You’ve likely run across quite a few subsets of impact investing, along with plenty of ways to measure said impact. Rather than overwhelm you with all the buzzwords, today’s focus is on a hot acronym in the sector: ESG. 

The trend placing people and the planet first is here to stay.

 

Today’s social impact is often judged based on environmental, social, and governance (ESG) criteria. And we’re not only talking about a handful of wealthy bohemians.

A 2018 report from US SIF Foundation found investors held $11.6 trillion in assets chosen with ESG in mind.

Depending on who you ask, that number could be closer to $20 trillion in AUM.

When you account for all sustainable investment approaches, the total may hit $40 trillion this year. Essentially, good vibes are eating the finance world.

The past decade has seen massive amounts of capital moving into sustainable investments.

And the pandemic only accelerated people’s interest in ESG.

ESG-focused funds saw record inflows in the first half of 2020, despite market turmoil due to the Covid-19 outbreak. Between April and June, there was an increase of over $71 billion globally, an undeniable demand for responsible investments. 

The pandemic has caused a flight to sustainable investing. 

Whether it be for tax perks or personal ideals, everyone’s looking to do some good. Especially Millennials, 95% of whom support putting positive impact right up there with profits.

With everyone piling into feel-good investments, you must be wondering…

“Is the market correct about ESG?”

 

Before laying down a verdict, it needs to be said: Impact investing as a whole is rife with subjectivity. 

That’s the whole point of ESG, a term coined in a 2005 study by the International Finance Corporation (IFC). Make it measurable, and even the stuffiest fund managers will get on board. 

Backed by enormous global initiatives like the Principles of Responsible Investment (PRI), ESG leverages big data and conventional reporting to track how ESG issues impact finance.

While not entirely resistant to Covid, 94% of sustainable indices realized more substantial returns than their benchmarks between January and March 2020. Stocks with higher ESG ratings did exceptionally well.

The pandemic notwithstanding, putting ESG first has paid off:


ESG investments have posted strong numbers. 

Building a portfolio that helps you sleep at night.

 

ESG and traditional investing are more of a spectrum than a binary case of good vs. evil. 

You’d need to consider a wide range of variables, including company size, expected returns, risk tolerance, currency, and government risk, all weighed against an investor’s specific goals. 

Christine Benz, Director of Personal Finance at Morningstar, gives us the skinny on building an ESG-based portfolio.

A devout ESG investor may take on more risk for less return if they expect their basket of investment vehicles to deliver a maximum positive impact. That would be bordering philanthropy.

Conversely, someone less focused on impact investment may compromise on slightly lower ROI in exchange for a marginally ESG-balanced portfolio.

Keep in mind that the economic climate is always shifting, so the above scenarios may change from person to person.

Suppose you consider how terribly oil companies are performing in 2020. In that case, an investor may sleep an extra hour per night by swapping out the Exxons and Chevrons with a few high-ESG-ranking renewables like First Solar.

There are many factors to consider when searching for sustainable investments. 

Know what you’re buying.

 

‘People before profits’ is the ESG mantra. Still, some ESG portfolios may hold positions in unexpected companies that aren’t generally associated with positive environmental, social, or governmental impacts.

While those above may have desirable returns, passive investors may unwittingly expose their capital to instruments that don’t mesh with their ESG investment goals.

Bank of America’s recent summary of top ESG holdings offers a glimpse into the top holdings of passive ESG funds worldwide. Companies such as Nestle, Amazon, Apple, and Microsoft rank within the top 10.

While not inherently evil, those companies aren’t exactly known for their social responsibility and environmentally safe practices.

ROI in socially responsible enterprises is about more than money – but there’s plenty of that, too.

 

One of the best ways to bank on ESG is through direct exposure to farmland and agriculture. Besides, what’s more green than socially responsible ag investing?

This asset class is extremely diverse, offering wide seasonal, regional, and time horizon variations. We wrote all about ESG in the ag sector earlier this year:

[ Why ESG Investment is the Future of Agribusiness ]

It’s such an obvious choice for both ROI and impact investment that you’ll smack your forehead after reading.

Farmland investments are yielding impressive numbers…

 

We’re talking about the most resilient investment out there. US farmland’s total return remained on a steady climb through the past three economic recessions.

Not only that, it’s been a reliable store of value through several decades of accelerating market cycles.

 Farmland returns have been historically consistent.

Real assets don’t get margin called. If you’re not a fan of volatility, look no further. 

One would be hard-pressed to find a more viable sector to make a difference in terms of environmental impact.

Sustainable agriculture practices are a net positive for ecosystems worldwide and are doubly impactful in emerging market regions.

Not to mention, the global appetite for healthy and environmentally-sound food has set to explode again in the coming years.

Take South America, for example…

 

Colombia’s organic food exports increased by 38% in 2019. As a whole, Latin America already accounted for 20% of global organic food trade in 2016.

While we’re here, Latin America is one of the fastest-growing economies on Earth. Investors are getting early-bird passes to one of the world’s best candidates for ESG investment.

“With oil and gas markets hitting record lows,” says Roland Potts, partner at international law firm DRT. “The region and global investors may use this opportunity to shift their focus to sustainable and green investments. 

With the arrival of the Covid-19 pandemic, Latin America and the Caribbean needs ESG now more than ever, offering a growing market for investors looking at the space.”

Emerging markets are one of the best places to park your money for high returns and a clear conscience. Read on:

[ Sustainable Investment in Latin America ]

[ Impact Investing in Sustainable Agriculture ]

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