Big, bold, brash—terms typically associated with star money managers, advisors and their high-net-worth clients. But what if they were also applied to more altruistic pursuits, while at the same time achieving solid returns in the investment portfolio?
It’s the thinking, at least in part, behind impact investing in public equities; the desire not to just invest, but invest in a manner that addresses societal and environmental challenges.
Enter the 2030 Sustainable Development Goals (SDGs) adopted by the United Nations General Assembly in September 2015— a list of 17 audacious initiatives, including eliminating poverty, fostering decent work and economic growth, and responsible consumption and production. Designed to track where (region, goal), how much and by whom (private, government, charitable) resources flow, they immediately resonated with member countries.
The SDGs also provide advisors with a definition of the planetary and societal needs, as well as products to offer clients that align with individual values. The 17 global goals provided by the UN SDGs are therefore a win-win for all involved.
A new report from InvestorFlow finds the most popular UN SDGs—from an impact investing capital allocation standpoint—include No. 1 (no poverty), No. 3 (good health), No. 6 (clean water) and No. 7 (affordable and clean energy).
So why, specifically, should advisors develop an expertise in impact investing and UN SDGs?
Three reasons are readily apparent:
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Recent U.S. Trust and Morgan Stanley surveys have revealed that more than 80 percent of younger investors and women evaluate socially responsible factors before reaching an investment decision. High-net-worth investors are also increasingly considering these factors as well.
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A transfer of wealth amounting to several trillion dollars is anticipated over the next two decades as assets shift to younger family members.
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A variety of socially responsible methodologies are getting increased attention.
Simply put, advisors who fail to recognize this shift of thinking in investor attitudes may miss out on a significant opportunity.
For those skeptical of impact investing’s staying power, consider that sustainable investment strategies have attracted roughly $23 trillion worldwide as of 2016, a 25 percent increase from 2014.
Yet according to GIIN, an industry research group, 94 percent of impact investments have been made via private equity deals and bond/debt products, with just 6 percent in public equities.
This has greatly limited the amount of assets invested, as most investors lack the assets and connections associated with private deals.
Two key issues have limited this democratization and expansion into public equity impact products. One is that not all SDGs can be easily translated into investable products; for example, how does one identify companies involved with the elimination of poverty?
The second is the requirement that a public equity product should offer diversification and be both liquid and transparent, besides being aligned with the SDGs.
So, until recently, a diversified core public equity solution aligned with the SDGs remained elusive.
New solutions, such as that designed by SSI Indexes, can solve these issues and serve as the basis for ETF products. The methodology, detailed at impactindexsolutions.com, takes a top-down approach to determine which SDGs are investable and screens the full universe of 6,500-plus firms listed on the NYSE and NASDAQ to identify those firms whose products and services target the 20 societal, social and environmental challenges it identified.
The methodology aligns well with the UN SDGs and, by definition, excludes problematic areas such as weapons, tobacco and fossil fuel exploration and production.
Ultimately, the underlying philosophy the UN SDG categories represent focus on finding solutions to global societal and environmental challenges. Combined with existing products offered by a number of firms focused on “green bonds” or impact-targeted debt products, advisors now have a number of effective methods for helping clients “invest with purpose” while targeting UN SDGs.
Scott Sacknoff is the CEO of SerenityShares Investments, an ETF sponsor and Maryland-based registered investment advisor.