Today’s investors are changing the way the market is shaped based on what they want the world to look like, and for good reason. The trend in savvy investing as a way of advocacy by focusing on environmental impact, sustainable business practices, contribution to local communities, and promotion of diversity and gender equality in the workplace, is growing. Investing in this way is enabling people to promote long-term and meaningful change by influencing corporate behavior, and this type of impact is enticing to many donors and funders.
In the philanthropic sector, we’ve seen a lot of interest and growth in this type of investing, and over the last few years, we’ve worked with our Board, advisory committees, and interested donors to offer a portfolio focused on Environmental, Social and Governance (ESG), designed for fundholders who seek to achieve competitive long-term investment returns, while also emphasizing a positive environmental and social impact.
According to “The Motley Fool,” a private financial and investing advice company, research increasingly shows that this investing method can “reduce portfolio risk, generate competitive investment returns, and help investors feel good about the stocks that they own.” ESG investments typically use a “negative” or “positive” screen to determine their strategy: negative screens are used to keep certain managers/companies out, while positive screens proactively seek investments that are committed to social good as well as profit.
One of the challenges to this type of investment is that the term “ESG” may mean different things to different investors. For some, it could mean divesting a portfolio of any investments in fossil fuels. For others, it might mean no investments that involve gambling or alcohol. Some savvy ESG investors will even invest heavily in what they may consider a non-ESG company in order to participate in shareholder advocacy for change.
Typically, an ESG Pool actively considers environmental (“E”), social (“S”) and governance (“G”) in the following guidelines:
- Environmental – this component focuses on a company's impact on the planet in both positive and negative ways. This can include a company’s carbon footprint, what chemicals are involved in its manufacturing processes, or what sustainability efforts they employ in their production.
- Social – this component focuses on a company’s social impact internally and in the community. Social factors can include everything from gender equality, racial diversity, and inclusion programs and hiring practices. It can even look at how a company advocates for social good worldwide, beyond its own influence in business.
- Governance – this component focuses on a company is driving positive change. Governance can include anything from executive pay, diversity in leadership, or even how well management works with shareholders.
For many funders and donors, maximizing their returns in order to maximize their grantmaking ability is the most important investment strategy. More and more, however, donors are looking to align their investments with their philanthropy. Several larger community foundations offer a range of ESG portfolios; still others are taking the next step to impact investing, which allows donors to invest in short-term, local investments or capital opportunities that prioritize social impact even if it means a smaller return over time.
The old myth that this type of investing didn’t see good returns is exactly that, a myth. At Triangle Community Foundation, we’ve had success that’s comparable to our endowment portfolio in the ESG Pool at the Foundation, and it has only increased interest. In addition to strong performance during market turbulence, issues of inequities, climate challenges, and social issues have all raised public awareness over the last year and created support for ESG investing, which aligns closely with the types of things that many donors at philanthropic organizations like community foundations are passionate about.
It’s heartening to see real world issues translating to investing and the market, and I’m encouraged by donor engagement around this topic and type of work. Investing in this way allows our donors and advocates for environmental, social, and governance issues to make even greater impact on these causes for good in our world, and we’re excited to continue growing and changing through this work.