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Impact investing comes of age, with the potential for social, environmental and financial returns
MAKING INVESTMENTS THAT MATCH people’s personal values has changed significantly over the past few decades. Early versions of “socially responsible” or “values-based” investing were primarily based on excluding specific investments that conflicted with an individual’s values (often at a potential cost in returns). But impact investing reflects a more active, results-driven investment approach. It’s based on a growing body of evidence that companies that are focused on accounting for both risks and opportunities linked to the environment, communities they operate in and society as a whole may potentially produce better financial results than those that aren’t, says Anna Snider, head of due diligence for the Chief Investment Office, Bank of America Global Wealth & Investment Management. “Impact investing points to tangible results and helps to move things forward in a positive way — not just making a moral judgment,” she says.
“Impact investing points to tangible results and helps to move things forward in a positive way — not just making a moral judgment.”
— Anna Snider,
Head of Due Diligence, Chief Investment Office, Bank of America Global Wealth & Investment Management
In her paper, “Impact Investing: The Performance Realities,” Snider observes that paying close attention to companies’ environmental, social and governance practices can help investors spot weaknesses before they appear on any balance sheet. Research from 2014 suggests that S&P 500 companies that were leaders on climate change, for example, showed 50% lower volatility and 18% higher return on equity than lower-scoring peers over the previous decade.1 Institutional investors, with their fiduciary responsibility to their constituents, might once have avoided socially responsible investments as too risky. But a growing number of them now feel the real risk lies in ignoring these factors. “The argument has been flipped on its head,” Snider says. “They’re seeing that a close look at a company’s environmental, social and governance activities gives them a very valuable set of information.”
Perhaps the most remarkable aspect of this movement is the speed with which it has gone mainstream, Snider adds. The number of U.S. funds incorporating ESG factors has grown exponentially in the past five to seven years, and the number of S&P 500 companies issuing corporate social responsibilities reports jumped from 20% to 80% from 2010 to 2014.2. In other words, the day seems to be approaching when “impact investing” will be known simply as “investing.”
1 Merrill Lynch Global Wealth & Investment Management, “Impact Investing: The Performance Realities,” November 2016, p. 9.
2 US SIF, “Report on U.S. Sustainable, Responsible and Impact Investing Trends,” 2016. Also cited in BofA Merrill Lynch Global Research, “ESG: good companies can make good stocks,” Dec. 18, 2016.
Past performance does not guarantee future results.
Impact investing and/or Environmental Social Governance (ESG) investing has certain risks based on the fact that ESG criteria excludes securities of certain issuers for nonfinancial reasons and therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.