Achieving your goals through impact investing

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As the bull market roared in the 1990s and fortunes were made (and lost in the tech-stock crash of 2000), there came into vogue among some investors a practice known as socially responsible investing, or SRI.

This type of investing had been around for decades. In the late ’90s, it became known as “investing with a conscience.” This investing philosophy involves avoiding investment in some historically profitable sectors, such as tobacco and oil companies, deemed by some to be less than socially responsible. The idea is to align perceptions of investment value with one’s values — invest directly to achieve desired outcomes.

Now SRI is widely called ESG: investing for environmental, social and governance goals. A type of ESG that’s s developing apace these days is impact investing, a proactive style that emphasizes helping societies in under-developed nations and economies.

This has spurred investment in companies that make micro-loans to startups worldwide deemed potentially beneficial to their countries’ cultures and economies but that might not qualify for conventional institutional financing — a form of venture capital.

Because the negative (avoidance) side of ESG limits the scope of possible investment, this can easily rule out some profitable companies.

This has generally been viewed as a sacrifice some investors have made — forgoing potential returns — to assure their capital is employed consistent with their values.

The impact on portfolios has been decreased ownership among proponents of stocks that pay regular dividends and an increase in growth companies, which typically don’t. This cuts into total returns.

Today, impact investing is no longer a financial sacrifice made for moral reasons. There are abundant indications that ESG investing is no less potentially profitable than regular investing, assuming a well-diversified portfolio.

Studies including a landmark 2012 investigation have found no real difference between the ESG results and those generated by standard portfolios in bull or bear markets.

Some large institutional investors have found their best success in what have amounted to impact investments. Regardless of whether they may have been disciplined to be impact investors, some have become de facto impact investors because it can be profitable.

An example is Ron Cordes, a former institutional investor not originally focused on impact investing. His positive-impact-related investments did so well that he increased his investment in them significantly. As Cordes and other large investors are realizing, impact investing can be good investment management.

What has changed the landscape to make impact investing profitable instead of a values-driven albatross?

There are more opportunities for impact investors, spurred by growing interest in companies whose goals or operations are consistent with it.

Another reason is shifting social values and a cultural sea change. As society has become more accepting of pertinent social and environment goals, so have major corporations.

More people now favor environmental protection, spurring investment in clean-energy technology in a nation burning far less coal than previously. Some large companies are focused on environmental goals because this can represent cost-effective management. Wal-Mart, hardly renowned for supporting liberal causes, has programs to support energy efficiency internally and among suppliers.

In the broader corporate workplace, there’s far more emphasis on minority recruitment and promotion than in the 1990s — opening up stocks in those companies to impact investors.

Corporate governance received a big boost from negative examples in the early 2000s with the implosion of WorldCom and Enron after they misled investors, and from the excessive risk taken by major financial service companies in real estate and mortgage-based investments that influenced the market meltdown of 2008-09. If they didn’t already believe in responsible corporate governance, investors who lost half their nest eggs when markets plummeted became overnight believers in ESG investing’s emphasis on managing risk.

Since then, far more investors look for strong risk management, and they’ve become ESG investors after a fashion. Thus, forgoing investment in what you don’t believe in and pursing it among companies you wish to empower is no longer an idealistic investor’s costly indulgence.

Rather, it’s a viable investment strategy that can earn returns while helping you sleep at night, confident you’re not financing those who create what you view as problems or stinting on those who solve them.

Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group. He can be reached at