Impact Investing

Lots of things didn’t play out so well in 2020, but impact investing— including environmental, social, and governance (ESG) and socially responsible investing (SRI)— wasn’t one of them. 

According to Fidelity, in 2020 “stocks at the top of our environmental, social, and governance (ESG) rating scale (A and B)…outperformed those with weaker ratings (D and E) in every month from January to September, apart from April.” That’s a big deal all things considered. 

Impact investing paid off for companies and investors alike in 2020. “Over a relatively short time frame…companies with high sustainability ratings performed better than their peers as markets fell. This bore out our initial hypothesis that companies with good sustainability characteristics have more prudent management and will demonstrate greater resilience in a crisis,” according to a white paper by Fidelity.

The bank’s findings don’t stand alone, rather they are the general consensus after a tumultuous 2020. 

According to Blaine Townsend, director of sustainable investing at wealth management firm Bailard in an interview with CFO Dive, 2021 is the year of ESG capitulation. “A lot of that comes from basic points we’ve argued for 50 years: companies who treat their employees and the environment better and are more transparent with stakeholders might make for better long-term investments.”

He suggests that companies should be proactive about ESG now to position themselves for long-term success. He also underscores that regulatory formalization of ESG reporting from the Securities and Exchange Commission (SEC) is on the horizon. 

Investors should take note, as well. Not only can ESG investing reduce portfolio risk, it can generate competitive returns, according to a report by Refinitiv that reflects consensus in the industry. 

Here’s what investors should know about impact investing in 2021. 

What Are the Top Impact Investing Trends in 2021?

“COVID, rather than dampening the interest in ESG-informed investing [has] actually…accelerated a number of these pre-existing themes,” according to AssetTV’s Jenna Dagenhart in an interview with Julie Moret, Head of ESG, Franklin Templeton Investments. 

According to Moret, there are four basic drivers of the ESG investing: (1) the growing relevancy of sustainability challenges, (2) a demographic shift to “millennials [that] are much more sensitized to environmental and social considerations,” (3) increased regulation and policy related to sustainability issues, and (4) increased pressure on corporations for sustainability disclosures.

According to MSCI, the top five ESG trends to watch in 2021 include (1) climate, (2) social inequity, (3) biodiversity, (4) investment return factors, and (5) increased reporting. Here’s why. 

Climate— The Biden administration rejoined the Paris agreement (which is designed to cut significant greenhouse gas emissions globally) immediately after his inauguration. As a result, corporations are busy setting emissions reduction goals in response to both investor demand and anticipated regulation. 

Social Inequalities— The pandemic’s impact on the most vulnerable people paired with the high-profile nature of the Black Live Matter movement have made social causes visible and paramount. According to Moret, “We’ve seen dislocations in markets, and we’ve seen the real impact on the economy… particularly [in] certain segments of the economies where employees…have been left with very little protection, whether that’s leisure, entertainment, and travel. I think it’s an absolutely reasonable expectation that post-COVID from an investor’s perspective, there’s likely going to be downward pressure on free cash flows.”

Biodiversity— Environmental issues are no longer limited to carbon emissions and climate change. Biodiversity loss presents major economic risks. According to an estimate by the World Economic Forum and PwC, approximately $44 trillion of economic value generation is tied to nature. That amounts to more than half of the global GDP. The COVID-19 pandemic has no doubt highlighted the potential “impact of greater contact between wild animals and human populations triggered by habitat loss,” according to IMPAX Asset Management. Investors can expect biodiversity to gain prominence as a named environmental priority in impact investing. 

ESG Investment Return Factors — According to the MSCI report: “In 2021, we see both hype and skepticism about ESG giving way to acceptance and a more nuanced understanding of when and how ESG has shown pecuniary benefits — and when it hasn’t.” There is a growing interest in correlations between ESG elements and performance, which are likely to be further analyzed and better understood in the year to come.  

More Data and More Reporting Companies are becoming increasingly focused on ESG in order to meet investor demands and attract investment. The government is also taking proactive steps to improve and regulate ESG disclosures, per a July 2020 report released by the U.S. Government Accountability Office (GAO) that evaluated the state of public company disclosures related to ESG issues. This means that investors and companies alike should expect more standardized ESG reporting requirements in the not-so-distant future. 

The COVID-19 pandemic changed the world and led average citizens and companies alike to reprioritize. If anything is clear, it’s that impact investing (whether by the name of ESG or SRI) is the way of the future. Not only is that encouraging for environmental and social change initiatives, it has proven that it will pay off for both investors and companies. 

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The information and data are as of the February 1, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.

LGBTQ

Socially conscious investing is on the rise. According to a report by the US SIF Foundation, 1 in 4 assets of the $46.6 trillion in investments professionally managed is invested in socially responsible ways.

Why? More than investing for strictly financial purposes, investors are increasingly considering the social impact that their investments can have. It’s more and more common for investors to want their portfolio to be holistic, putting their money to work to support causes they personally care about.

Also known as socially responsible investing (SRI), this trend is described as investing in companies that have firm ethical practices. Investors can participate in SRI on a range of issues that are important to them, from the environment to social concerns. LGBTQ investments, an emerging trend in the space, have the power to support anti-discrimination measures as they relate to gender identity in the workplace.

For the LGBTQ community, the legalization of gay marriage in 2015 changed finances in many households. From taxes, to retirement planning and pensions, marriage equality made partners into formally recognized households and more aligned financial partners.

And, this community has money to invest. According to LGBT Capital, LGBTQ household wealth is estimated at $18 trillion globally, approximately $6 trillion of which is in the United States.

For these reasons and more, investing in companies that are explicitly supportive of the equality of the LGBTQ community is a growing trend that’s here to stay.

What Is LGBTQ Investing?

LGBTQ investing is using investments to advance social equity, specifically by supporting publicly traded companies that support anti-discrimination measures related to sexual orientation, gender identity, and gender expression.

Offerings that have both an ethical and financial concern have a long history and are still expanding.

Environmental, social and governance (ESG) factors address non-traditional issues as a key part of financial analysis. First coined in 2005 by the study “Who Cares Wins,” ESG factors include how a corporation handles environmental stewardship, treats its employees, manages supply chains, and more.

ESG, while newer than Socially Responsible Investment (SRI), builds upon it and states that corporations that practice ESG are better poised to compete successfully. Around the same time of the “Who Cares Wins” report, the UNEP published the “Freshfield Report” which demonstrated more specifically how ESG factors are relevant to financial valuation.

Soon after these reports in 2006, the Principles for Responsible Investment (PRI), a voluntary set of investment principals, were launched by the New York Stock Exchange followed by the Sustainable Stock Exchange Initiative (SSEI) in 2007.

These initiatives speak to the core interest of investors in investing in companies that have values that align with their own.

In the meantime, in 2002, the Corporate Equality Index (CEI) was introduced by the Human Rights Campaign Foundation. Its purpose is to rate the LGBTQ-inclusivity of businesses from 1 to 100. This is a helpful tool both for companies wanting to know how they stack up and investors with a commitment to supporting the advancement of LGBTQ inclusivity.

It’s been shown that companies with more pro-employee policies tend to have better performance, making LGBTQ equality a relevant ESG factor. In this space, specific workplace benefits identified by the CEI include domestic partner benefits, transgender-inclusive benefits, employee resource groups, and public commitment to the LGBTQ community.

According to the CEI 2020 report, 91 percent of Fortune 500 companies (including those who participate in the survey and those that do not) include gender identity protections in their nondiscrimination policies. This is up from just 3 percent in 2002.

And while environmental stewardship might be a more traditional ESG factor, LGBTQ equality is an example of an increasingly relevant and popular ESG factor.

How to Invest in LGBTQ? 

In 2018, UBS launched a fund that matches investors with companies that “respect, protect and encourage their lesbian, gay, bisexual and transgender employees.”

Investment portfolios are increasingly versatile tools depending on investor criteria. LGBTQ investments can be incorporated into portfolios in a variety of ways, from meeting specific criteria to more broadly supporting the community.

According to the Corporate Equality Index (CEI) the top ten companies according to the 2020 index are (1) Walmart Inc., (2) Exxon Mobil Corp. (3) Berkshire Hathaway, (4) Apple Inc., (5) UnitedHealth Group Inc., (6) McKesson Corp., (7) CVS Health Corp., (8) Amazon.com Inc.,  (9) AT&T Inc., and (10) General Motors Co.

The corporate world is becoming more inclusive. Now more than ever, investing in LGBTQ is a matter of choosing to be aware of which companies are explicitly inclusive, and putting your money there.

Of course, investing in companies based on social issues isn’t easy, as different companies take different approaches to these concerns and often their businesses are not directly related to them. However, ETFs and mutual funds focused on social and equality issues are a good way to access this growing sector without having to invest directly in specific companies. A search on Magnifi suggests there are a few different ways to do this.

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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the June 15, 2020 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.