Impact investing is a megatrend that is here to stay. Sometimes referred to as ESG, short for Environmental, Social and Governance, it is the idea of investing in businesses that are trying to have a positive social and environmental impact. While we expect the entire sector to see exponential growth over the next several years, there is more than one impact fund that has tremendous momentum. We took a look at what makes these top impact funds different from the bunch.
Impact investing can be accomplished by investing in individual stocks, or by investing in an impact fund. The managers of impact investing funds will determine how strict of a social impact investing criterion will be used for the impact fund and then find the best businesses that fit that criterion.
The goal of impact investing via an impact fund or individual stock purchases is to make a good return on your stock investments but do it via businesses that are focused on more than just making money for its shareholders.
The origins of impact investing go back at least several hundred years. But it really started to pick up momentum 50 to 60 years ago when protestors of the Vietnam war pressured university endowments to not invest in defense contractors. The specific term “impact investing” dates to only 2007 when it was first used by the Rockefeller Foundation
Fast forward to today and there is over $700 billion of assets under management with impact investing funds.
You can understand the logic and attraction of the trend of social impact investing. Given the choice between investing in businesses that are solely focused on making money for its shareholders and those businesses that are focused on making money for its shareholders AND going good things for society, the vast majority of folks would choose the latter option.
Let’s get even more specific. Given the choice of investing in a fossil fuel business like Chevron and a renewable energy company like Brookfield Renewable Partners, which would you choose? Chevron destroys the planet to get its raw materials out of the ground and its customers pollute the planet with the finished product. Whereas Brookfield uses hydro power to generate its energy, which is very environmentally friendly.
When you make this type of stark comparison you can understand why the impact investor makes the social impact investment in Brookfield and not Chevron.
Today there are more than 1300 social impact investing funds geared towards investors that want to invest in businesses who believe in their social responsibility. Here are some good performers for 2020 that look set to do well again in 2021.
This impact investing fund is on the smaller side right now with $123 million in assets at the end of 2020, but if they keep performing the way they did in 2020, they will get big in a hurry.
The fund believes that “companies that are pursuing sustainable business models can also create lasting value for themselves and their shareholders”. This is the essence of impact investing.
And while the fund has focused on businesses that are “making, or will make, a positive impact on our world”, they have not sacrificed the quality of the returns their investors demand. Returns for 2020 exceeded 25%, and the fund has returned an average of 12.5% over each of the last five years.
It just goes to prove you can get good financial returns while also demanding the businesses you invest in make the world a better place.
This is truly an international fund with more that 95% of its assets invested outside the United States. Its largest holdings are larger Chinese conglomerates, Tencent and Alibaba.
With the Vanguard Social Index Fund you get a much larger fund at more than $7 billion in assets under management. And as is normally the case with Vanguard you get a tiny expense charged to you of just .14% ($14 for every $1,000 invested).
The Vanguard Social Index Fund looks to exclude investing in “firms with significant ties to tobacco, alcohol, nuclear power, adult entertainment, gambling and fossil fuels”. It also refuses to invest in companies with “human rights, labor, corruption or environmental controversies”.
The above exclusions still leaves many very safe large companies to make up its top holdings like Apple, Amazon and Microsoft. This allowed the fund to earn approximately 22.6% in 2020, which again shows that you can get good financial performance while avoiding businesses that are not helping society.
So here with the iShares Global Clean Energy ETF you get a very specific niche within an impact investing strategy. The goal of this fund is to focus on “a market weighted index of 30 of the most liquid companies involved in clean energy”. And it is powered by Blackrock, which is a top-notch money manager.
The fund has more than $600 million in asset under management and its recent financial performance was outstanding. The ETF’s returns were greater that 120% during 2020 and frankly I expect continued good performance in 2021 as we believe the rotation out of fossil fuels and into renewable energy still has a ways to go.
Impact investing is a megatrend that is just getting started.
Not everyone has the time to research individual stocks, so investing in the right impact fund can be a good alternative.
The three highlighted impact investing funds show that you don’t need to sacrifice the quality of your financial returns by investing in businesses that are making the world a better place.
Use the three examples above to help you start your research in this area.