SMITH BRAIN TRUST – So you want to put your money where your values are. Then the latest in growing investment trends – impact investing – might be for you.
When you choose to invest in a company not just for the financial return, but also for the company’s environmental and social actions, you’re participating in impact investing.
Growth in this category of investing comes, in part, as a response to the effects of corporate short-termism, says Rachelle Sampson, associate professor of logistics, business and public policy at the University of Maryland's Robert H. Smith School of Business.
Sampson’s research has shown corporations and investors shifting significantly toward short-term objectives in the past 30 years. That shift can lead to short-sightedness and jeopardize the long-term viability of financial and non-financial ecosystems alike. This shift happens as firms focus on short-term returns to shareholders at the expense of investments in other stakeholders, such as employees and the environment.
Enter the “ESG factors.” Environmental, social and governance (ESG) criteria are now being used by several investment firms to measure organizational impact on society and the environment.
BlackRock, the world’s largest asset manager, is perhaps the most notable organization asking companies to report how they’re doing across these dimensions. BlackRock CEO Larry Fink became a catalyst for ESG adoption in 2016 when he called upon chief executives to pay greater attention to these factors in his annual letter to CEOs. He underscored the importance of environmental and social factors in managing risk and providing sustainable returns over time.
Fink called out environmental and social factors in subsequent annual letters as well – signaling a movement in the marketplace that isn’t going away.
There are other signs publicly traded companies are paying attention to ESG factors as well. In addition to industry heavyweight BlackRock, other institutional and individual investors have begun to ask for it too.
At the start of 2016, sustainable investments accounted for 26 percent of professionally managed assets across major economies globally. That’s up from 21.5 percent in 2012. Meanwhile, 37 percent of high net-worth individuals report paying attention to impact investments.
Most importantly, the financials hold up. Research has found sustainable investing produces desirable effects on shareholder returns.
So, where’s the catch? Impact investing is still young. Investors would be wise to ask who is measuring what constitutes responsible social and environmental impact. Is it meeting a renewable energy goal or harvesting food sustainably? Is it a particular supply chain configuration?
“The measures today are imperfect,” says Sampson. “What’s measured varies by industry and independent verification of what’s reported isn’t widespread.”
Despite this, Sampson contends there is still clear value in more companies recognizing ESG factors as a source of value creation. Large organizations have had well-developed social responsibility departments for decades. But ESG criteria push the responsibility deeper into the organization. “Real change will come from companies who measure sustainability efforts and treat them as central to strategy.”
Transitioning environmentally and socially conscious actions out of the corporate social responsibility model into every department – from operations to R&D – could change the corporate footprint in a big way.
“If considering ESG factors in investment decisions works the way it’s intended, we mitigate risks and make a stronger economy,” says Sampson. “We do better.”
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