Responsible investing (RI), is not a new concept; in fact, according to some estimates the term was first coined over a decade ago in 2007. Since that time, the field has evolved rapidly. What started out as a smaller niche industry available only to a few private investors and philanthropists is well on its way to becoming mainstream. According to the Forum for Sustainable and Responsible Investment (US SIF), one in five investments in the U.S. takes environmental, social and governance issues into consideration.1 Because of this growth, it is now possible for investors to dedicate their entire portfolio to responsible investing and still achieve diversification across multiple asset classes without sacrificing return. Heightened demand is behind the spike in the number and type of investment options that are now available to investors who are seeking the double bottom line from their investments.
There are many different approaches and definitions of RI. The graphic below illustrates three: one passive or screens-based approach - Ethical - and two active approaches - ESG and Impact. Within this paper, RI will refer to the two types of active investment approaches. The first approach, ESG, includes those investments that “aim to incorporate environmental, social and governance (ESG) factors into investment decisions.”2 For example, as pertains to the environment, a responsible investor may look for companies that do not harm the environment with their products or practices or that create services/ products that help the environment. Socially, one might look for investments that provide supports aimed at improving the quality of life of those that live in low to moderate income communities. For those focused on governance, an evaluation of corporate governance practices and proxy voting methodologies is necessary in order to ensure corporate responsibility.
The second approach is impact investing, which offers investors the ability to earn a return while also targeting social causes and directing their investments towards those select causes. The field of impact investing is rich with creativity and enthusiasm. Impact investments are available in support of many various impact arenas, including affordable housing, health care facilities in underserved areas, job training programs and access to higher education. The possibilities are limitless. In this paper we will explain how it is possible to invest an entire portfolio in responsible investments and still maintain diversification without sacrificing return.