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Purpose meets profit: Becoming a social impact investor

Wells Fargo leaders discuss why social impact investing is increasingly attractive to investors, and ways to integrate it into a portfolio.

October 11, 2017

For many investors, making a positive impact on the world is an important part of their financial goals. Yet, they don’t want to sacrifice returns to do it. Is there a way to have both — investments that make a positive social impact and that can also perform well?

There is — with a little bit of research and soul-searching. Educating investors who might be new to social impact investing about all of their options is critical, said Jessica Mann, head of Environmental, Social, and Governance (ESG) at Wells Fargo Asset Management, which manages $487 billion in institutional assets as of June 30, 2017.

Mann said social impact investing can be incorporated into portfolios in a variety of ways, including these three key approaches:

  1. Exclude investments that don’t align with core beliefs. If industries or individual companies participate in actions that run counter to investor values, that might be a sign to invest money elsewhere. For example, some investors choose to exclude so-called “sin stocks” — companies that trade in alcohol, tobacco, gambling, and firearms.
  2. Integrate ESG research into investment decision-making. Continue to look at traditional markers such as financial performance, but also check a company’s ESG scores for its record on environmental stewardship, diversity, corporate governance, executive compensation and pay, community relations, labor relations, and other factors. By adding ESG analysis into traditional investment research, Mann said, investors can make more informed decisions about the companies they invest in.
  3. Engage in direct dialogue with portfolio companies. Investors can communicate directly with company management and the board of directors to press for change, said Claire Veuthey, senior ESG research analyst for the Social Impact Investing team of Wells Fargo Private Bank. This could range from encouraging the nomination of female directors to requesting that the company report on how it manages the impact of climate change to the business.

Something for everyone

As social impact investing becomes more mainstream, an increasing demand for more and higher quality socially conscious investment options has flooded the market, said Mike Taylor, investment strategy analyst for Wells Fargo Investment Institute.

Socially responsible investment assets grew more than 76 percent from 2012 to 2014, according to a November 2014 report from US SIF: The Forum for Sustainable and Responsible Investment. Taylor said that social impact investments now account for about $1 out of every $6 under professional management in the U.S.

Among institutional investors worldwide, the amount of assets committed to socially responsible investing is $68.4 trillion as of April 2017 — up from $6.5 trillion in 2006 — according to the United Nations-backed Principles for Responsible Investing (PRI).

“The sheer variety of investment choices available for purpose-driven investors reduces concerns that a single, particular vehicle is not aligned with an investor’s priorities, or that choices are available only to high-net-worth investors,” Taylor said.

Simply put, there is now something for everyone — both institutional and individual investors.

Tenacre Foundation, whose ministries focus on Christian Science nursing, has seen their portfolio continue to grow by investing in socially responsible companies that share their values.

“We look at our investments to not just sustain our mission, but more importantly, to bless all mankind,” said Cate Murdoch, Tenacre’s chief financial officer. “This is true investing.”

Millennials invest to ‘bring about positive changes’

Millennial investors, especially, prefer a combination of purpose and profit in their investments. According to the new 2017 Wells Fargo Millennial Study, 76 percent of millennials believe socially responsible companies will have more long-term success. 

The study also found that, if given $1,000 to invest, 86 percent of millennials would want to invest in a company that makes the world a better place with their product.

“They’re very selective about their investment choices, as they hope to bring about positive changes in areas like agriculture, animal rights, education, environment, and health care,” said Taylor.

The proof is in the performance

The most common question about social impact investing is how well the investments perform, and if value-based choices require lower returns. Veuthey said the concerns are unfounded.

She cited research by Lloyd Kurtz, head of Social Impact Investing for Wells Fargo Private Bank, that found long-term results for social impact investments — when adjusted for risk — are competitive.

In addition, the  MSCI KLD 400 Social Index — a list of 400 U.S. companies that received high ESG scores for having positive social or environmental impacts — has slightly outperformed the broader market (in results not adjusted for inflation) since the index’s debut in 1990.

“Social impact investing returns have generally matched the overall market over an investment timeline of many years,” Veuthey said.

What's on the horizon?

Veuthey’s team is monitoring the response of individual companies as some federal regulations in place under former President Obama have softened or been eliminated, and the legal requirements for companies to report on their ESG issues have also lessened.

She said the 2016 U.S. election was a clarifying moment for many investors who chose to be more explicit about aligning their portfolios with their areas of interest, such as gender equity and environmental conservation.

“It’s our job to identify the companies that understand the win-win of engaging with stakeholders in ways that benefit their business, versus those seeking only to comply with regulations,” she said.

But even with the increased scrutiny that the growth in social impact investing has brought to companies’ social, environmental, and financial returns, Veuthey said, “very rarely does a company score highly on every measure.”

The key for investors seeking to match their investments to their values, she said, is to take a broad and careful look, and invest for the long haul.

“You may choose to hold on to a company that is improving in their ESG factors, such as commitment to energy efficiency or product safety, to take advantage of the potential for stronger returns over a long investment horizon. The more you know about a company, the better informed your investment decision will be.”

For more about social impact investing, read the Wells Fargo Investment Institute’s “Ask the Institute” report (PDF) or see the Social Impact Investing section of the Wells Fargo Private Bank website.


Risk Factors

All investing involves risk including the possible loss of principal. There is no assurance any investment strategy will be successful or that a fund will meet its investment objectives. 

Sustainable investing focuses on companies that demonstrate adherence to environmental, social, and corporate governance principles, among other values. There is no assurance that social impact investing can be an effective strategy under all market conditions. Different investment styles tend to shift in and out of favor. In addition, a fund’s social policy could cause it to forgo opportunities to gain exposure to certain industries, companies, sectors, or regions of the economy which could cause it to underperform similar portfolios that do not have a social policy.

Definitions

The iShares MSCI KLD 400 Social ETF seeks to track the investment results of an index composed of U.S. companies that have positive environmental, social, and governance characteristics as identified by the index provider.

An index is unmanaged and not available for direct investment.

General Disclosure

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to any particular investor or potential investor.

Wells Fargo Investment Institute, Inc. (“WFII”) is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company.

Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. 

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