Socially responsible, sustainable, impact, ESG. These terms are often used interchangeably to describe investments that have a purpose beyond making a profit, but they shouldn’t be. They each have a different meaning, which can be confusing to advisors who want to attract and keep clients interested in such investments, including millennials.
Moreover, an increasing number of investors already own or plan to own such investments.
A TIAA survey of investors conducted earlier this year found that about one-third of investors say they currently own responsible investments and nearly 50% of those who don’t, plan to do so soon, with millennials sharply outpacing their elders on that account: 69% vs. 43%.
Given this backdrop, advisors could use a deeper understanding about what exactly these investments are.
Patrick Drum, a portfolio manager at Saturna Capital who has led the firm’s efforts to help financial advisors connect with clients on sustainability-related issues, has developed a visual representation of the differences between the various labels that describe investments with a social dimension, called The Sustainability Smile.
At one end is Traditional Finance, which looks strictly for positive investment returns without any consideration of the social dimension of an investment; at the other end is Philanthropic donations, which have no goal of making money.
In between is the continuum of investments that have a social dimension, with that consideration increasing as it moves from left to right and closer to Philanthropic.
Integrated Investing, for examples, prioritizes the profit motive but includes an overlay of secondary considerations such as environmental, social and governance (ESG).
“ESG is about financial performance but takes into consideration a broader set of due diligence questions on how environmental, social and governance facts drive or inhibit performance,” said Drum.
Financial performance is secondary. The preference is on how to optimize results, taking into account all other factors that are not just financial, said Drum.
Ethical/Advocacy tries to balance the profit motive with either the exclusion of certain investments such as tobacco or firearms that may also reflect an investor’s religious faith or the advocacy of certain shareholder positions.
The Carbon Divestment Campaign, which challenges carbon-based companies such as oil companies to transition toward more renewable energy sources, is an example of such advocacy, said Drum. In this category returns matter but there is “a certain level of ‘return forgiveness,” explained Drum.
Moving along the continuum is Thematic/Impact Investing, where financial performance takes a back seat to either the social theme of the investment, such as clean energy, or the social impact, which may not have a social theme. The priority is the measurable impact these investments have on society whether it be social, environmental or something else, said Drum.