Market Monday: Impact Investing

Who: Financial firms seeing an opportunity to turn a profit through impact investing products.

What: Impact Investing: Investing in socially responsible companies.

When: December 18, 2017

Why: “76% of millennials see investment decisions as a way to express their social, political and environmental values”.

My Thoughts

This is an interesting concept overall. This is also nothing new as socially responsible investing (SRI) has been around for a while. The concept is straight forward and simple. Create an investment fund that invests in companies that meet some socially responsible criteria. This could mean many different things depending on what the customer is searching for.

For those concerned about health it could be avoid companies that sell junk food, cigarettes, and alcohol. Those focused on climate change could invest in clean energy alternatives. If political party is the concern it could focus on investing in companies that support one parties overall message. The possibilities are virtually endless. However, the bottom line is that you must have investors to keep a fund open. This means whatever the idea it must reach a decent amount of people to be sustainable.

Additionally, these types of funds generally will come with extra associated costs. The millennial generation says they are looking for ways to have an impact while investing but what will they say if returns come in much lower? In many cases doing the right thing is not the most profitable way of conducting business. No matter what happens it is great that such a high percentage of millennials are wanting to make a difference. That 76% number was just pulled from the article and has no source so take it with a grain of salt as well.  If there is enough interest in anything wall street will find a way to make a profit, so it is great to hear this being discussed.

What Are Your Thoughts?
  1. Do you care where your investment dollars are directed?
  2. Would you take a lower return on your investment to make a positive impact?
  3. Have you invested in an impact investment in the past, please share your results?

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25 Comments on “Market Monday: Impact Investing”

  1. This is an interesting topic. And that figure – 76% – jumped out when I saw the original CNN article earlier today.

    I’m sure there were earlier opportunities, but I know Vanguard has offered the Vanguard FTSE Social Index Fund Investor Shares (VFTSX) for over 17 years now. (Note: we have NOT invested in this fund and are not currently considering).

    From Vanguard’s site, a lot of the names should be recognizable and many investors probably already get exposure to these via ETFs or index funds:

    Month-end ten largest holdings as of 11/30/2017
    Rank Holdings
    1 Apple Inc.
    2 Microsoft Corp.
    3 Alphabet Inc.
    4 Facebook Inc.
    5 Johnson & Johnson
    6 JPMorgan Chase & Co.
    7 Bank of America Corp.
    8 Wells Fargo & Co.
    9 Procter & Gamble Co.
    10 UnitedHealth Group Inc.
    Ten largest holdings = 25.8% of total net assets

    On your other questions:

    1. Do you care where your investment dollars are directed? – Yes, but in terms of asset class, asset allocation, and account type, etc.

    2. Would you take a lower return on your investment to make a positive impact? – It depends on the scope impact / investment. Mrs. BD and I already donate some of our time / $$ to things that are important to us or respective items (organizations, causes, etc.); if we believe it makes a positive impact, we’d consider.

    3. Have you invested in an impact investment in the past, please share your results? – I have not yet, but will consider further for the opportunity to do good (in addition to seeking a stable return at the same time – why not?).

    Again, interesting topic. Good to ponder and discuss. Thanks for the post.

    Balanced Dividends recently posted:
    https://www.balanceddividends.com/my-20-year-addition-9-things-ive-learned/

    1. That is so funny Mike. Before replying I was responding to Steve and used Wells Fargo as a company that was in some hot water recently! Then there they are on the top 10 list of a SRI fund. I am with you and guilty (for lack of a better word) on being more focused on asset allocation and diversification. Thanks for weighing in.

  2. Hi DM, I am gen x so I am sure my opinion might be different from others. I have never directly bought stock in any shady or irresponsible company. I do not take into account any social responsible investing when I purchase indexes or ETF (mainly broad indexes).I am mainly concerned about diversification.

    1. Hey Steve, I think that would be the general consensus of most. I think under this definition though by owning index funds (myself included) we are providing capital to all companies. So when companies like Wells Fargo get hit with predatory practice fines we as investors allow it to happen by funneling money into the companies. With that being said though I do not know what the “correct” answer is for this sort of thing.

      1. This is a good point. Maybe the truth is you must earn the money through whatever avenue necessary and then you have the choice to donate to what you think can make the biggest impact like you mentioned Mike.

  3. I find this topic particularly interesting because it stirs the cognitive dissidence inherent to the “passive” investing movement, which millennials are also strongly associated with.

    One of my preferred pot-stirring, snarky lines for cocktail parties and blog comment sections is this:

    “There is no such thing as passive investing; someone has to pick the stocks that go in the index.”

    What’s the difference between excluding some company from an index because it doesn’t meet certain market cap criteria vs some made up “sustainability quotient”?

    The premise of the “passive” movement is “Thou can’t beat the market so thou shalt only try to match it.” But what is “the market” anyway?

    Do you want to match the “market” returns of the 500 largest US companies or the 429 largest US companies that happen to not make weapons/tobacco or mine coal?

    And as you point out, the criteria that matter to one investor, might not be a big deal to someone else. “Positive Impact” is a pretty subjective phrase. So you end up with a bunch of niche funds that have high expense ratios because they can’t scale up enough to bring their costs down.

    Personally I only have one non-financial filter for individual stocks I invest in:

    No pyramid schemes. I don’t care what the SEC (or anybody else) says…MLMs are pyramid schemes and I won’t intentionally invest in them directly.

    Now I own index funds that probably hold some Herbalife and I sleep fine at night, but I’m not going to buy it explicitly.

    1. All valid points. If you are investing in an index you are investing in something constructed by someone. Something like VTI holds 3,588 companies. So you really do not care where your money is going as long as you own a piece of everything. Overall I think owning the whole market works well because most investors are such horrible stock pickers.

      Personally I do not have any additional filter either but it is an interesting topic to think about. These types of products are also not constructed by fund groups out of the bottom of their hearts so fees end up being to high. Maybe we need some portfolio managers that are retired and made their fortunes to start a low cost impact investing fund.

  4. Hey, Mr. DM. I’ve never considered SCI much. I just want to make money and as long as the business is legal that is good enough for me. For example, I have made many investments in tobacco stocks, alcohol stocks, oil stocks, coal burning utility stocks etc. etc. Conversely I have also invested in Nextera (NEE) which has a significant business focus on green energy. That’s not why I invested in NEE, but it has generated a good return never the less. I’m not sure my approach is right or wrong; good or bad, just the way I go about it. Tom

    p.s. I just became your first Pinterest follower. I have learned a lot building my boards and pins over the past couple months. Let me know if I can assist you in that journey in any way.

    1. I don’t think there is anything wrong with that strategy. A part of me also thinks it is not my responsibility to make sure no one smokes so it doesn’t matter if I own a stock in RAI.

      Awesome Tom thank you I might do that. I need to get more involved with all the social.

  5. I should probably do more to discriminate where my invested dollars go. It’s hard to do this with our 401Ks at work – you get very few options. That said, a good half of our dollars go into real estate, so that’s significant.
    I figure once we’ve retired I’ll have more control over how my 401K dollars, rolled into Vanguard IRA, will be invested.

    1. Through a 401(k) you do not have many options in terms of something like this. Real estate I think can be an asset class you can make an impact in. Yes you need to set out to make a good investment in the begging but over the years when cash flow does not mean so much to you I could see opportunities to help people. Not that it is necessary just would feel great to let a struggling mom and kid live free for a couple months to give back directly in your local RE community.

  6. I don’t think you necessarily need to invest in a fund that does the work for you. You could just invest in individual companies that are pursuing the social good that you want to see in the world. This may take more work but if it’s important to you it may be worth it.

    1. I agree David, this step would most likely be down the road in most peoples investing career as well. For instance I only invest 5% of my overall portfolio into individual stocks. So in my opinion even with a large portfolio of $3 million we are only talking about $150K here. That is a drop in the bucket when you are talking about making a big impact.

  7. In the beginning of my investing endeavor, yes I bought companies that impacted my life; stuff I used, places I shopped, so usually end-user and retail companies because I knew first hand about their products and services. I’ve won and lost using this strategy. Since then I have diversified more into other areas. It makes sense for millennials and even younger people to invest in what they know and that’s a great starting point. But at some point you have to research and think about diversifying in order to avoid risk, maybe in one or two market sectors.

    1. I think you have to focus on diversification from the beginning. I hope no one is going all in to any sector, stock, or crypto currency right now. This has been a great bull market where mostly everything is making money but if it were to reverse and your chips are not spread across the table you could really feel the pain.

  8. Hi DM!

    I’ve heard of SRI for a while but never put much thought into it. Probably because I’m not even there yet. I just invest in passive ETF funds and a few single stocks. As long as the expected long term returns are decent, I’m okay with whatever I invest in (as long as it is a legal of course).

    Regarding the question: would I take a lower return if it makes a positive impact. I definitely would as long as my overall returns are good enough to sustain or help fund my living! If it can do both, I’m all up for it!

    So, impact investing is something I can definitely think about once I’m ready for it (hopefully one day) lol.

    Overall, this is a great topic to think about! 👍

    1. I am there with you FSP. Many younger people of course would like to make a change with investing. Reality is most young people don’t even invest. Makes you wonder who they even polled for that question. I think it would be easier to invest in the best way possible and then pick and choose where your profits go down the road.

  9. I totally agree DM. We have been investing in varying funds over the years. Certainly taking into account the track record of the fund and the companies it contains. Now we are able to be laser specific with our philanthropic donations. We feel that is the most impactful formula for donating our time and capital.

    Thank you for bringing socially responsible investing and giving into the spotlight!

  10. I never factored in SRI when I first created my portfolio and when I rebalanced it. I am more worried about diversifying it since that’s a big factor. Since I’m a young Gen-Xer, I might think differently than the millennials that were polled and were more concerned about SRI!

  11. Gen X’er here. Consider me jaded, but I am skeptical that any public traded company can be a socially responsible one. In my experience, once you become beholden to shareholders, the mighty dollar rules and those “values or social principles” soon fly out the window. With that said, I’d love to hear about anyone who has had a good experience investing in a social biz.

    1. Great point! Maybe there needs to be a fund that only invests in private companies? I would love to hear that as well so far I don’t think it is the case haha!

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