Socially responsible investing is likely here to stay. According to The Forum for Sustainable and Responsible Investment, the size of the sustainable, responsible, impact investing market has grown from $4.8 trillion in 2012 to $8.1 trillion as of the end of 2016. This market now accounts for $1 out of every $5 invested by asset managers in the United States.
As this sector has evolved, the names, categories and labels remain variable, overlapping and largely undefined. ESG. Socially responsible investing. Community investing. Impact investing. The host of ever-changing labels brings with them confusion and an uncertainty as to what managers are promising to deliver and what impacts investors are seeking to achieve. And there is little consensus as to how impacts are quantified and reported. In addition, there is still a measure of hesitation by pension plan consultants and trustees to recommend impact strategies due to concerns regarding fiduciary responsibility to the pension plan.
However, two recent developments stand to change this. First, the Department of Labor issued guidance in 2015 acknowledging that environmental, social and governance (ESG) "issues are not merely collateral considerations or tie-breakers, but rather can be proper components" of investment choices, providing fiduciaries with new clarity. Second, there is increasing evidence that seeking social outputs does not necessarily require a sacrifice in financial return, thus aligning impact investing more directly with a fiduciary's traditional duty.
Institutional investors are gaining greater sophistication in this area, enabling the field to evolve from a focus on implementing a set of factors and exclusionary screens to a set of strategies that generate measurable social impacts together with competitive returns for pension plans. As part of this evolution, institutional investors also are increasingly interested in quantifying the impact of their investments along with the financial return.
Today, the number of product offerings is diverse and provides a wide array of potential benefits. While one strategy may focus on investments in clean energy power plants, another might focus on supporting companies that promote health and wellness. Still others might focus on international investments addressing the United Nations Sustainable Development Goals.
Read the rest of the piece in the October Benefits Magazine available here as a PDF.