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Can "Social Investing"​ ever achieve investors goals?

Can "Social Investing"​ ever achieve investors goals?

| March 08, 2019

The Evolution, and Growth, of Social Investing

Just as the term "emerging markets" displaced "third-world countries" in conversation, so too has the finance industry adopted new terms like "ESG", "impact" or "sustainable" investing to refer what was once called social investing. And over time, that greater clarity has resulted in increased acceptance with mainstream investors. Fortunately, there are more reasons for this gained interest than just new terminology.  Investors are newly empowered and more engaged.  And that's a good thing.

Terminology aside, financial industry observers recognize that social investing is now among the fastest-growing segments of the industry, (up 38% over the past two years) and now accounts for 25% of the $46 trillion in assets in the US that are under professional management.

Achieving Objectives

When anything grows this fast, one is wise to check their assumptions. Is social investing actually achieving the social and financial aims that investors wish to achieve?

Mutual fund experts at Morningstar suggest that the financial objectives are being achieved, with returns that are the same, or better, than their conventional peers. The graphic below shows that social mutual funds are just as likely to rate 4 or 5-Stars (the top third) and 3-Stars (middle third), but are less likely to rate 1 or 2-Stars (lowest third.) Investors who choose among social funds, therefore, are just as likely to be successful.

And at the stock level, Morningstar has a similar conclusion. The graphic below shows how Morningstar's sustainability indexes (made of companies with top sustainability rankings in each segment) outperformed their benchmarks in 16 out of the 20 segments.

So, performance is competitive. But what about meeting investors' social objectives? To make a real impact, investors may need to add another component to their portfolios.

Sustainable plus Impact Investing

In discussing non-financial returns from an investment (i.e., their impact), it is important to make a distinction between two groups of securities. The first is what we'll call "sustainable" investments. These exist largely the public sphere, and are typically stocks, bonds and mutual funds that are evaluated on their environmental, social and corporate governance (ESG) characteristics. Contrast that with what we'll call "impact" investments. These are usually in the private realm and include private equity and notes, venture capital, etc.

Why make this distinction? Does it mean that the second group inherently has a greater impact? I think it does.

Experts point to the concept of "additionality"-- adding something new to the world in order to address a specific need. Private investing is more likely to (but not always) have additionality, and a real impact, by funding new ventures, adding renewable energy capacity, etc.  It is inherently more difficult to execute, however, and introduces new and different risks, such as illiquidity (i.e., you have to lock up your money for many years.)

Consider the additionality of deciding to sell Chevron to buy Tesla. Unless you bought Tesla in its IPO, or in an early-stage private offering, this trade doesn't necessarily add anything new in the world. It is still a highly worthwhile to align your own investments with your personal values, of course!  In fact, it's a critical first step in a sustainable and impactful investment program, even if the impact from "values alignment" in Step One is more about the investor than about the world.  The good news is that an investor's likelihood of achieving their values alignment objectives in this segment is high, and the results are measurable.  Additionality, however, is not the strong suit of public securities.

An investment program that seeks a societal impact, then has to go one step further. Once the investor identifies the portion of their portfolio that can be devoted to very long-term investments, they can then identify the specific societal needs that they wish to address with their capital. A good framework for this decisionmaking was set out by the UN in their outline of seventeen Sustainable Development Goals, or SDGs (shown above.)  Private impact funds are very clear about which SDGs they are addressing.

Finding private funds to accomplish these objectives is the implementation stage in a targeted process to meet these SDG-based goals. In evaluating private funds, investors have a wide array of options and can also decide if ALL of their investments need to earn a competitive returns, or if some impacts are so valuable that they are willing to lower their expectations in those specific cases. This process can be complex and multifaceted. But this precision should ultimately make meeting these unique objectives more achievable, and more measurable over time.


In the end, investors who are most dedicated to this approach are combining a sustainable portfolio of marketable securities with a carefully crafted impact strategy of private investments. They are creating a unified program that has a far better chance of achieving both their financial and social goals. It's is up to each investor, then, to define the appropriate balance between return objectives, personal values alignment and the desire for a greater societal impact.