The idea of socially responsible investing has been around for more than a century, and was first formalized in the 1920s when The Pioneer Fund became the first investment vehicle to formalize a simple approach to screen out “sin stocks” such as alcohol, tobacco and gambling enterprises.
Over the decades, however, the concept has evolved, embracing emerging social issues such as civil rights and apartheid, along with mounting concerns over environmental issues that firmly took center stage as the new millennium began. Recently in fact, a large consortium of foundations, endowments, municipalities and institutional investors announced the divestment of $50 billion from the fossil fuel industry, as part of a renewed commitment to fight climate change.
Yet all of these approaches share a fundamental common thread—they seek to punish perceived bad behaviors by depriving offending firms of investment capital, rather than incentivizing and rewarding positive behaviors through the infusion of capital. The latter is precisely what impact investing is all about.
As defined by the Global Impact Investing Network (GIIN), impact investing focuses on “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.” In an effort to create real value for both society at large as well as their portfolios, impact investors strive to funnel their capital to both for-profit and not-for-profit organizations committed to socially worthy endeavors such as affordable housing, healthcare, education, sustainable agriculture, renewable energy, water conservation, and microfinance.
Doing well while doing good
While some impact investments may potentially generate returns that meet or even exceed market rates, most impact investors approach the endeavor with both a willingness and an expectation of sacrificing some of the potential market gains they might otherwise realize, in exchange for supporting the issues and causes that matter most to them.
According to the Cambridge Associates Impact Investing Benchmark Survey conducted in June 2015, the financial performance of 51 private investment funds with social and financial objectives compared to 705 regular funds showed an average annual return of 6.9 percent for the impact funds compared to 8.1 percent for the non-impact funds. For many investors, that’s a relatively small sacrifice in performance when weighed against the ability to do good.
And as the socially driven millennial generation begins to climb the professional ranks and assume corporate leadership roles, the growth of purpose-driven organizations and opportunities is likely to continue accelerating. According to the GIIN, the current $60 billion of impact capital is expected to climb to nearly $2 trillion over the coming decade.
For investors looking to better align their portfolios with their social conscience, impact investment strategies may provide an ideal solution. Your SunTrust advisor can help you explore the various impact funds that are working to address the causes that matter most to you.