What’s the difference between funds labeled sustainable, responsible, green, ESG and impact? The label won’t necessarily tell you — and may just create confusion, as ThinkAdvisor has reported.
Rising interest in impact investing has generated a flood of products labeled “impact” by their creators, but these options vary wildly and there are no naming standards. No wonder advisors and investors are struggling to communicate about impact investing.
Standards will emerge, but advisors who want to keep and attract the growing ranks of sustainability-minded investors can’t afford to wait. The best solution right now is to map client goals and available products on the impact spectrum.
Using a simple, common language that distinguishes between values alignment (when assets reflect an investor’s values) and impact contribution (when assets help solve a big world problem), advisors can efficiently create portfolios that meet client goals.
Building a Values-Aligned Portfolio
I’ve found it’s easiest to start with values alignment. For advisors, the first step is determining investor intent: Knowing what the client wants to achieve is as important for impact as it is for asset allocation. Because particulars vary by client, advisors can add a lot of value in portfolio construction.
Values-aligned portfolios typically have these characteristics:
- Enterprises invested in have a commitment to all stakeholders (customers, employees, suppliers, communities, shareholders, the planet).
- That commitment is measurable via voluntary reporting (such as an annual ESG report) or a minimum score on an ESG scoring system such as those offered by Sustainalytics or MSCI.
- The enterprises conduct activities the investor is willing to support, or if not, are best-in-class examples in “dirty” sectors like fossil fuels.
Knowing the client’s intent, you can comb through their existing portfolio to identify investments that don’t fit their criteria, and then create a plan to replace them over time with investments that do. Toniic co-founder Charly Kleissner calls this process “detoxifying the portfolio.” It takes time, but it’s rewarding to see the portfolio shift from investments that can cause harm to investments that avoid harm and even benefit multiple stakeholders.