The Rise of Impact Investing
There’s a growing trend among CEO’s, business leaders, and investors that corporate America should be doing more to positively impact the world. Driven largely by consumer demand, what started as quirky one-for-one give-back business models have morphed into a ground-up reexamination about the role corporations play in society. The public now expects — and in some cases, demand — corporations give back the larger community in meaningful ways. And this new attitude has made its way to the highest echelons of the investment community.
Earlier this year, the founder of the world’s largest investment firm sent an open letter to the leaders of the world’s largest companies warning them that they better be good with their money, or risk losing their major investors.
In his letter, BlackRock CEO Larry Fink said:
“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
Mr. Fink’s statement garnered a lot of attention and signaled to many that the biggest firms in the world were finally hearing the message consumers have been repeatedly sending. But even before Fink’s letter, some organizations were already riding this new wave of corporate responsibility by creating investment products comprised of what they determined to be “socially conscious” corporations.
Called impact investing, this strategy makes investments in companies, organizations, and funds that make positive and measurable social and environmental impacts, alongside a financial return. But how impactful is this type of impact investing really? As with many things in life, you have to dig a little deeper than the marketing message to uncover the truth.
In many cases, the true impact of these investment vehicles depend on how you define impact. For example, the Vanguard FTSE Social Index Fund Investor Shares (VFTSX) “tracks the investment performance of the FTSE4Good US Select Index, a benchmark of large and mid-capitalization stocks, that are screened based on social criteria such as workplace issues, environmental issues, product safety, human rights, and corporate responsibility.” While that all sounds well and good, a quick glance at the companies included in the social index fund makes you wonder what impact they’re truly making.
The fund claims to invest in companies that rank well for corporate responsibility, but Wells Fargo & Co. is among its 10 largest holdings. If you’ve paid any attention to the news over the last year, you know that Well Fargo has not acted like a good corporate citizen. In fact, they’ve served as the model for everything wrong with the big banking industry.
What is the Company’s True Purpose
The point here is not to nitpick because under scrutiny, no company is perfect. Instead, it’s to simply point out that achieving real change is going to require more than a nicely worded letter, catchy fund title, and a few narrowly-drawn investment rules. Instead, true change will require a ground-up redefinition of corporate and civic responsibility and perhaps even capitalism itself.
This isn’t a pipe dream. A new generation of entrepreneurs and corporate leaders understand that profit and impact are not mutually exclusive. And in many cases, an authentic impact strategy can actually drive profits. This is how we built GroundSwell, with a social purpose at the core of our business model that benefits our investors, our company, and — most importantly — our nonprofit partners.
We may never realize a future where all corporations work towards making positive social impact alongside profit, but everyday we’re able to make better decisions about who we support and why. So as you’re making your own investment choices, take some time to research these so-called impact funds and their holdings. And while you’re at it, check out some local investing options. Then determine how authentic their desire is to make change and how effective you think they’ll be. Is doing good a core component of their mission or simply a shrewd marketing investment? That could mean the difference between a true impact and simple window dressing.