Want To Make An Impact? Here Are 3 Misconceptions About Impact Investing
Impact investing is a strategy that is designed to allow you to make an impact when you invest. Impact investing is also referred to as environmental, social and governance (ESG) investing and it refers to the three central forces in measuring the “impact” of an investment in a company or business. It’s one thing to invest your money and watch it grow. It is another thing to invest your money and make a positive impact along the way. As with many things on Wall Street, there are many ways to make an impact and the key is to find one that works for you. Here are three misconceptions about impact investing.
1. You Must Sacrifice Performance To Have An Impact:
The first popular misconception is that you have to sacrifice your performance if you want to make a big impact. That is not the case today. The first serious attempts in the solar and other types alternative energy, for example, were all hugely unprofitable, and many early investors did not do well. So were other areas of Impact such as oncology and energy storage. But not anymore. With rapid technological advancements, many impact themes are profitable and are some of the best growth stories around today. Corporate responsibility is also having a big impact (pardon the pun) and it is doing a lot of good for the communities. Recent studies show that companies that have diversification among employees and on the Board of Directors – can lead to better businesses and better stock performance.
2. Impact and ESG Company Data Are Readily Available
Unlike the financial data on public companies, there’s no definitive list of ESG categories and the data exists very sporadically. There’s no regulatory mandate (yet), and many companies are unwilling to publish data that may diminish them in the eyes of shareholders and public at large. For example, an industrial company is most likely not going to want to openly disclose its pollution data. Consumer companies will not likely want to publicly provide data regarding the number of consumer complaints they receive. A problematic Board of Directors is not likely to red-flag itself. In Emerging Markets, ESG data is virtually non-existent. On the little data that does exist, the data sometimes sends mixed messages and there is no credible way to audit that data (yet).
3. Impact and ESG Criteria Are Pretty Clear Cut
Most investors believe that a company is either making an impact or it is not. The same goes for the funds with the Impact / ESG label. Since it is very tough to quantify, it is very tough to accurately label which companies are making an impact and which are not. I spoke to Igor Tsukerman CEO and Chief Investment Officer Passed Pawn Advisors, and he brought up a great point about how most things in life are not black and white. Igor said, “The fact is that, as with most things in life, there’s little black and white, and a lot of grey. It’s up to the fund manager, index provider or an individual investor to decide whether any metrics merits a stock inclusion or exclusion into their selection criteria, or merely changes the weighting in the portfolio. Is a score of 70 in the carbon footprint high enough? Is a score of 20 in Board Independence a reason for exclusion? Investors would typically have some exclusion criteria and use the average scores across many categories to determine eligibility and weighting.” Igor also told me about Facebook and what happened in the wake of its data scandal. Igor said, “Last year, Facebook stock was dropped from several ESG funds after bad failures to protect users’ privacy and apparently poor governance to deal with the problem. Other ESG funds chose to keep the stock in their portfolios. This is in contrast to credit rating agencies, for example, where a downgrade to junk status mandates all investment grade bond fund managers to dump the name.” So, as you can see, everyone can define impact investing based on what it means to them.
The concept of impact investing has been around for the past few decades but it still has a long way to go. One could argue every company that hires people makes an impact on their employees’ lives. Sure, that is true and that’s why there is no strict definition for impact investing. At the end of the day, everyone is free to define impact investing anyway they want. The key is to make sure you are focused on investing in a way that works for you.