— Demographic changes and the availability of more information than ever about businesses’ operations are contributing to a shift toward sustainable and impact investment options.

Such terms, once solely synonymous with investors who shied away from so-called sin stocks, now encompass a wide range of investing strategies intended to generate more than financial returns.

Instead of simply screening out certain entities, today it often means proactively selecting entities that rank highly when it comes to environmental, social and governance (ESG) factors, investing thematically and investing to address specific social or environmental concerns.

photo

Monica Piepenkotter

La Jolla-based Merrill Lynch Private Banking & Investment Group advisor Monica Piepenkotter said the option of allocating money while taking into consideration social impact once put off many investors because it was unclear whether it could generate appropriate financial returns.

“They held the belief that it would require a trade-off in their portfolio performance, potentially, because the negative screens can amplify risk by reducing diversification,” said Piepenkotter, a senior vice president with the New York-based firm, where she has advised clients since 2000. “What we’ve seen is the combination of more reliable data on ESG, enhanced portfolio construction techniques through our chief investment office and different investment approaches and innovative structures reversing the mentality toward impact investing.”

Investors in 2016 considered ESG factors across $8.72 trillion of professionally managed assets in the United States, according to the U.S. SIF Foundation, which publishes a biennial report on sustainable, responsible and impact investing trends. That’s a 33 percent increase since 2014 — and one-fifth of the $40 trillion in investment assets managed in the U.S. that year.

Leading ESG Criteria for Money Managers

Environment (general)

Social (general)

Governance (general)

Conflict risk

(terrorist or repressive regimes)

Climate change/carbon

Human rights

Pollution/toxics

Board issues

Sustainable natural resources/agriculture

Product Safety

Transparency and anti-corruption

Executive pay

Green building

Products (general)

Community

relations/

philanthropy

Source: US SIF Foundation 2016 report

Structured Investing

The institutions, money managers or investment companies that manage those funds either considered ESG issues in selecting investments across a range of asset classes, or file shareholder resolutions on ESG issues at publicly traded companies. “I think people are getting more interested as there is more evidence that shows what investors can do financially by investing in organizations that are doing good for society and the environment,” Piepenkotter said. “There’s been a big pickup in interest.”

Millennials are leading the charge, she said.

“They tend to be more socially conscious, and they’re focused more on what is a meaningful life and what is impactful for them and they want their investments to reflect that as well,” she said.

Prev