Investing With Purpose: Doing Well While Doing Good

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The holiday season invites both year-end planning and a spirit of generosity.  Investors have many options when considering both financial and social returns.  Here is a brief discussion of social finance or the concepts and trends where wealth and values meet. 

Social finance offers investors ways to realize competitive returns through investments designed to achieve meaningful societal or environmental impacts. Investing in socially and environmentally conscious ways is growing in popularity with all types of investors. In fact, sustainable, responsible and impact investing accounted for $22 trillion in global assets at the end of 2014. By understanding the options available to them, investors and their families can better align their wealth with their personal values and implement various social finance strategies designed to reflect their financial, legacy and philanthropic goals.

Social finance is any investment activity that generates financial returns for investors and has a positive societal and environmental impact. Underneath the broad umbrella of social finance, there are four key strategies with varying styles, focuses, and degrees of impact: responsible investing, environmental finance, development finance, and impact investing.

1. Responsible investing incorporates considerations related to environmental, social and governance goals (ESG) into portfolio management and investment decisions.

2. Environmental finance strategies seek to protect ecosystems by contributing to the economic growth of low-carbon power and other environmentally friendly industries and sectors.

3. Development finance offers investors who have a long-term view and an interest in emerging and developing markets around the world a way to geographically diversify their portfolios by helping to mobilize private-sector finance through lower-risk opportunities.

4. Impact investing is attractive to investors who seek to more intentionally effect positive social or environmental change and have a transformative social impact.

Why do investors adopt social finance strategies? Decisions to explore or adopt social finance strategies are not necessarily driven by charitable intent. Here are some considerations:

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Personal Values

For some individuals, deciding to invest in a socially-responsible manner stems from strongly held personal beliefs.

Fiduciary Obligations

Generally speaking, these individual and fiduciary investors seek competitive investment returns while investing in a manner consistent with their personal values or fiduciary mandate. Potential social or environmental change is not a primary focus.

Environmental, Social, and Governance Goals

Some social finance investors want to incorporate values-based investing with altruistic intent, seeking competitive returns from investments. Others may want to narrow that focus, selecting investments that further very specific environmental or social goals. An example of this BNY Mellon’s “PWER Portfolio” a portfolio that focuses on about 170 companies that passed a gender diversity and leadership screening and met BNY Mellon Wealth Management’s investment criteria.

In addition to using social finance for personal or fiduciary-driven motives, many investors also seek competitive investment returns. Fortunately, achieving competitive performance and even outperforming non-social finance investments seem to be realistic goals. According to a 2015 study by the Global Impact Investing Network, investors reported that their portfolio performance overwhelmingly met or exceeded their expectations for social and environmental impact and financial return. Of course, past performance is never a guarantee of future results, and the performance of one social finance strategy is not necessarily correlated to another. Still, the data indicates that investing responsibly and outperforming the market are not mutually exclusive objectives.

Social finance allows investors and their families to clearly identify shared values and goals and align them across areas of mutual interest. Because younger generations may want to put a greater focus on sustainable investing to achieve social and environmental impact, social finance is also a great way to bridge the gap between generations.

There are many ways of using wealth to support personal values while affecting societal or environmental change. The holiday season provides an excellent opportunity to begin these discussions. To get started with social finance, investors and their families should identify their goals and motivations. Doing so will provide some direction as to how, where, and which social finance strategies may help achieve those goals.