Does investing in impact mean that I should expect lower returns?

Investors want positive returns. Swell investors want positive returns and for their investments to have a positive impact. The Swell team aims to deliver profit as well as purpose by investing in companies that are both poised for growth by addressing global social and environmental issues.

The MSCI KLD 400 index, which tracks companies with high environmental and social impact, has outperformed both the S&P 500 and the Russell 3000 on an actual and risk-adjusted basis for the past 25 years.

If that sounds too good to be true, you can also rest assured that you’re not alone in wanting to choose these strategies. Currently, more than one in five dollars—8.72 trillion or more—that are professionally managed are invested in socially responsible strategies.

Still looking for evidence that investing in impact can represent a strong approach? There are plenty of academic studies and articles to back it up. Here’s a breakdown:

  • Impact investing includes only companies with strong environmental and social policies, which tend to drive performance. A study done by Harvard business School, Columbia Business School and NYU found that companies whose employees believe that their work has meaning—which the paper notes is often characterized by positive impact on social and environmental issues—are more productive. This pays off for these companies with higher future accounting and stock market performance.

  • Impact investing addresses risk. Think about this--the events that tend to negatively affect shareholders, e.g. BP’s Deepwater Horizon or Volkswagon’s emission scandal, are often labor and environmental focused. An article from the National Association of Corporate Directors explored how boards cope with reputation risk, stating intangibles account for 87% of market value for the S&P 500. Impact investing tends to diversify away from these risks.

  • Impact investing is thematic investing--a proven approach. According to a McKinsey & Co. report, thematic investing takes place when selecting groups of companies that will benefit from long-term support of structural trends. For example, when the 193 countries of the UN all agreed on September 25, 2015 to move forward with the 17 Sustainable Development Goals (SDGs), this represented a trend of long-term support from government and industry of structural trends around themes like climate change, energy efficiency and health. Investment managers who incorporate themes into their investment process tend to consistently outperform the market. Over long-term time periods, thematic investing provides a clear performance edge over the broad market benchmark, the MSCI World Index.

Looking to dig in further? Here’s a list of articles and resources with more information on socially responsible and impact strategies.

Davidson, Alex. “‘Sustainable Investing’ Goes Mainstream.” The Wall Street Journal. January 13, 2016. 

diBartolomeo, Dan. “Equity Risk, Default Risk, Default Correlation and Corporate Sustainability.” Journal of Investing, March 2011. 

Eccles, Robert and Serfeim, George. “The Performance Frontier: Innovating for a Sustainable Strategy.” Harvard Business Review. May 2013.

Edmans, Alex. "Does the stock market fully value intangibles? Employee satisfaction and equity prices." Journal of Financial Economics. December 2010.

Gunnar Friede, Timo Busch & Alexander Bassen (2015) “ESG and financial performance: aggregated evidence from more than 2000 empirical studies.” Journal of Sustainable Finance & Investment, 5:4, 210-233

Gordon Clark, Andreas Feiner & Michael Viehs."From the stockholder to the stakeholder: How Sustainability Can Drive Financial Outperformance." University of Oxford. March 2015.

Mozaffar Khan, George Serafeim & Aaron Yoon (2016) "Corporate Sustainability: First Evidence of Materiality." The Accounting Review, 9, 1697-1724

"Responsible Investing: Delivering Competitive Performance" TIAA Global Asset Management. April, 2016.


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