Social Impact Investing - Strategies & Opportunities
Over the next decade, more than $20 trillion is expected to flow into companies and investment funds that focus on social impact investing.
This new form of investing has caught the attention of many institutional investors who are now focusing on what matters most to millennials - the next generation of retail investors.
Read on to learn more about social impact investing and how you can get started too.
Social Impact Investing Meaning
Investing for social and environmental impact became increasingly popular over the 2020 coronavirus pandemic. As millennials - who are considered to be the next generation of investors - are now more focused on the impact of their actions on the world investors have also followed suit.
The definition of social impact investing is quite simple and involves focusing on investments in companies and funds that are focused on a sustainable future. Social impact investing is also known as socially responsible investing, green investing, sustainable investing and ethical investing.
A more common phrase for this style of investing is ‘social impact investing ESG’ in which ESG stands for environment, social and governance. ESG is a metric used by investors and asset management companies to score certain investments on how ethical they are by using a negative and positive screening process.
- Positive screening: This process aims to identify companies that demonstrate or show a commitment to achieving a very high standard of practice in its environmental impact, social justice and corporate governance.
- Negative screening: This process involves identifying the so-called ‘sin stocks.’ These include gambling, tobacco and weapons. Other issues such as human rights, deforestation, animal testing and genetic engineering may also fall under this category.
Investors and fund providers focused on ethical investing would focus on investing in companies that have a positive screen, while avoiding companies that have a negative screen. Many publicly traded companies are moving towards investing for social and environmental impact but some are leading the way as you will discover further in this article.
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Environment, Social & Governance (ESG) Examples
Fund providers who provide access to investment products such as mutual funds and exchange traded funds are now creating ESG scores to inform investors on how socially responsible the investment could be. This is done by focusing on the different categories in social finance impact investing.
- The environmental category involves looking at climate change, pollution and waste, carbon emissions, renewable energy and natural resources.
- The social category involves looking at labour management practices, health and safety, data security, privacy and product sourcing.
- The governance category involves looking at corporate ethics, board diversity, tax transparency and anti-competitive practices.
Does impact investing work? In the first quarter of 2020, research shows that 87% of MorningStar’s indices which track sustainable companies and funds outperformed the broader market, showing the shift in investors’ attitudes.
Some of the biggest asset managers in the industry are also shifting more resources to ethical investing. The Blackstone social impact investing platform is a good example of the commitment to sustainable investing from larger institutions.
Let’s have a look at some of the other companies and funds that investors are focused on.
Top Companies & Funds Involved in ESG
Many publicly traded companies all around the world are now focused on ESG principles. Some companies are leading the way in each one of the ESG categories while others are focused on just one or two. Either way, knowing the companies and funds which are leading the way in social impact investing is a good place to start.
1. Starbucks (SBUX)
Starbucks has been focused on corporate social responsibility for quite some time as most of their coffee beans come from regions that have lower social laws and fairness. For example, the coffee-chain retailer supports farmers with fair trade practices and maintains a 99% ethically sourced coffee bean.
The company is also leading the way in the environmental category by removing all plastic straws from its stores and focusing on building new stores that are ‘green.’ Starbucks, along with Nike, Microsoft, Unilever, Danone, Mercedes-Benz AG and others, is one of the founding members of the Transform to Net Zero coalition.
Source: Admirals MetaTrader 5, #SBUX, Monthly - Data range: from 1 Jan 2006 to 16 Mar 2021, accessed on 16 Mar 2021 at 12:30 pm GMT. Please note: Past performance is not a reliable indicator of future results.
In the long-term, monthly price chart above for Starbucks’s share price, it’s clear to see the trend higher. This is confirmed by the 20-period (blue), 50-period (red) and 100-period (green) exponential moving averages all moving higher.
However, there have been some significant dips in price along the way. The most notable dip in the uptrend that started in 2008 was the drop during the coronavirus pandemic in 2020. Since then, the share price has recovered and remains in an upward trend.
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2. NVIDIA (NVDA)
NVIDIA is a technology company famously known for its powerful graphics cards and chips that are used by cryptocurrency miners. As a variety of different minerals and metals are used heavily in the company’s graphics cards and chips they have a strong link to environmental issues.
The company has the highest rating from the MSCI (Morgan Stanley Capital International) fund provider and its ESG rating, holding a AAA rating. How did it achieve this? There are a variety of factors which include:
- The creation of a board-level governance committee to oversee ESG investing.
- A dedicated recruitment programme for diversity.
- A commitment to pay equality.
- A commitment that the minerals used in its chips do not come from conflict zones and are responsibly sourced.
Source: Admirals MetaTrader 5, #NVDA, Monthly - Data range: from 1 Jan 2006 to 16 Mar 2021, accessed on 16 Mar 2021 at 12:30 pm GMT. Please note: Past performance is not a reliable indicator of future results.
In the long-term, the monthly price of NVIDIA’s share price above it shows a huge increase in volatility from 2018. This was largely due to the surge in demand for its graphics units from cryptocurrency miners. There has also been a huge boom in gaming of which NVIDIA is a big player.
The company may also have attracted investors due to its AAA ESG rating from fund management providers MSCI. As MSCI also provide exchanged-traded funds related to ethical investing, the fund manager themself will buy stocks in highly-rated ESG companies. You can also invest in the funds directly as discussed in the next section.
3. iShares MSCI USA ESG Select ETF (SUSA)
An exchanged traded fund is essentially an investment product that holds a basket of other securities. The iShares MSCI USA ESG Select ETF is a fund that holds a basket of stocks that rate very highly on ESG metrics while avoiding stocks that rate very poorly on ESG metrics.
The fund itself provides detailed rating information on its factsheet, with an 87.75% MSCI ESG Quality Score. It also provides a detailed breakdown of the companies that are held within the fund. This provides useful insight to individual investors looking for highly rated ESG companies.
Source: iShares, 16 March 2021
You can also invest directly into the iShares MSCI USA ESG Select ETF, instead of investing in the 227 stocks that the fund holds. However, some investors may use the list provided by MSCI to help with their own analysis and looking for other metrics to make decisions such as company earnings reports and sales trends.
ETFs allow investors to gain exposure to sectors and themes without having to do individual stock market research. The methodology chosen by an investor depends on the time and resources they have available.
However, ETFs do provide another level of diversification. For example, if one stock fell due to a bad earnings announcement, the overall ETF may not move that much as it holds a basket of hundreds of other stocks. This is dependent on the weighting of each stock within the fund which is detailed in the fund’s factsheet.
Source: Admirals MetaTrader 5, #SUSA, Monthly - Data range: from 1 Jan 2006 to 16 Mar 2021, accessed on 16 Mar 2021 at 12:30 pm GMT. Please note: Past performance is not a reliable indicator of future results.
The long-term, monthly price chart of the iShares MSCI USA ESG Select ETF is shown above and it’s clear to see the strong demand for it during the coronavirus pandemic of 2020. This trend could continue as new policies setout by governments all around the world now have a focus on sustainability and climate change.
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Source: Admirals Premium Analytics, 16 March 2021
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.