What is the Social Impact of an ESG Investment?
ESG Investing has moved mainstream.
But... Does it actually create a meaningful social impact?
Disclaimer: Unlike traditional financial reporting, measuring the social return is much more subjective.
There are multiple layers of impact associated with ESG investing. Think of the various layers of an onion...
We'll talk about:
Public vs Private Investments
There are two main ways to invest.
The Public Market (Stock Market)
The Private Market (Outside of the Stock Market)
This is important to understand because for many of us, the Public Market will be our main avenue to invest.
While we all can invest in private investments, these are primarily reserved for institutional or accredited investors. (investors with high income or net worth requirements)
In general, Private investments will allow you to have more social impact. However, private investments involve more work, more due diligence and a deeper knowledge of investments.
The benefit of private investments is that the social impact is usually clearly stated and measured.
Here is an example from one private investment:
Because sustainability is a key factor for these private investments, they will often times create an annual impact report.
As you can see, the social impact of private investments is usually pretty clear and measured.
Public (stock market) investments on the other hand generally have sustainability as a sort of "value add". Shareholder returns are still the primary concern.
As a result, social impact is a bit harder to measure. Also understand that you are likely to be invested into a basket of stocks (in a mutual fund or ETF), which will add an additional layer of complication to measurement.
Do not in any way take this to mean that public investments have "less" impact!
Understand that the impact is different.
It is less direct and more broad.
Here is an example from a sustainable ETF.
As you can see, the impact of public investments IS measured. It is just not quite as detailed as private investments.
Remember, this is just the outer layer of the onion.
Developed vs Emerging Markets
Digging a layer deeper, it is important to consider location of investment.
What level of impact would a $1 donation have in America vs other areas of the world?
According to the International Moneteary Fund,
Every $1 invested into emerging market SME's (small & medium sized companies) contrubutes to a further $13 to the local economy.1
So if you want the most impact, focus on the emerging markets portion of your portfolio.
Shareholder Activism is where shareholders attempt to influence a company's decisions by exercising their rights as partial owners of the company.
Shareholders in a company can recommend a Shareholder Resolution to a company's board of directors.
These resolutions are then voted on at the company's annual meeting either in person, or through Proxy Voting.
Shareholder Resolutions and Proxy Voting can be used as a tool to influence a company to change or improve environmental, social or governance policies.
Shareholders can also write letters to a company's investor relations department.
They can also request in person meetings with management and executives.
Shareholders can also choose to divest from a company.
Real Impact Example
The documentary Lever provides some real life examples of the impact that can be attained through sustainable investing.
Source: Green Century
The positive effects of ESG investing cannot be ignored.
You must understand however that you may not see direct and clearly measurable results on the surface level.
The social impact of sustainable investments is multi-layered.
Similar to a donation to charity, you do not demand a measurable result prior to your donation.
You donate to a charity because you believe in the cause. You believe in their purpose and want to support their cause.
This I believe is how we should also view the social impact of using a sustainable investment.
What this all means for you:
If you don't know where to get started, I would encourage you to check out our Ultimate Guide to ESG Investments.
If you prefer to delegate, feel free to schedule a phone call. We're happy to help...
We're a different kind of financial firm than you may be used to.