Yahoo Finance What You Should Know About Impact Investing
More Americans, especially millennials, are interested in investing in sustainably minded companies that hold a tangible connection with their social values.
Robert Johnson, president and CEO of American College of Financial Services in Bryn Mawr, Pennsylvania, predicts the election of President Donald Trump will be a "boon for impact and socially responsible investing."
"Trump is a polarizing political figure and the nation is politically divided," Johnson says. "People who are concerned about the direction of the country feel that they need to take action. Many people are awakening politically and feel the need to do what they can to change the direction of the country."
Impact investing started before Trump took office. But as many experts say public investments in clean energy, affordable housing and foreign aid will likely dry up, private capital may replace some of the public spending.
[See: 7 of the Best Socially Responsible Funds.]
"We are already seeing anecdotal signs that private sector investors will be motivated to increase their impact investing," says Daniel Kern, chief investment officer of TFC Financial Management in Boston.
According to a 2015 study by Morgan Stanley, 71 percent of individual investors describe themselves as interested in sustainable investing and nearly two in three (65 percent) believe sustainable investing will become more prevalent in the next five years. Also, 84 percent of millennial investors are interested in sustainable investing.
Between 2014 and 2016, sustainable, responsible and impact investing grew by 33 percent, increasing from $6.57 trillion in 2014 to $8.72 trillion in 2016, according to the US SIF Foundation.
"More than one out of every five dollars under professional management in the United States today -- 22 percent of the $40.3 trillion in total assets under management tracked by Cerulli Associates -- is involved in socially responsible investing," reads a foundation report.
Since Trump's election, Stephanie Genkin, the founder of My Financial Planner in New York, says she's seen "a small uptick" in the number of clients who are asking about socially responsible funds.
"These are generally millennial clients, new to investing, who are frustrated and angry about the political climate in Washington and seeking investment advice for IRAs," she says.
While some investors may want to exclude companies with human rights violations others may want to include certain criteria like reducing waste or energy consumption. "The major issue with socially responsible investing is that the definition differs from individual to individual," Johnson says.
Although socially responsible investing has been around for decades, Craig Bolanos Jr., CEO of Wealth Management Group in Inverness, Illinois, says a number of financial firms in the mid-2000s began including environmental, social and governance factors using proprietary metrics to create specific offerings.
Some investors, especially millennials, have switched to impact investing, which focuses investing not just for profits but on "value drivers."
"Socially responsible investing has morphed into impact investing," says Wei Trieu, senior vice president and partner at Bellwether Capital Management in San Ramon, California. "It's gone from 'I don't want to spend money in oil stocks and cigarette makers' to 'I want to change the world and put money into those companies that are making a difference.'"
[See: 10 Energy ETFs That Will Clear Your Consicence.]
"The first thing most investors ask is, 'Am I shooting myself in the foot? Am I diluting my portfolio return?'" Bolanos says. "They still want to do it but struggle with greed."
Like any asset allocations within a portfolio, Bolanos says investors should look at fees, expense ratios and sustainability of the investment program.
"Make sure the asset base is north of $25 million, preferably higher than $100 million," he says. "Just as dot-coms and small businesses start and fail, so do a lot of mutual and index funds."
Many of the funds don't have long published track records, Bolanos says. It's important for investors to find out how much seed money a fund company has given a fund and see if capital is flowing into the fund consistently to allow it to be a 10- to 20-year investment, he says.
"The challenge for most investors is that many of the impact investment opportunities are private market investments -- venture capital, private debt, private equity, and direct lending," Kern says.
Here are five finds the experts recommend:
iShares MSCI KLD 400 Social ETF (ticker: DSI). This socially responsible ETF tracks an index of companies that have "positive environmental, social and governance characteristics." Among its 400 holdings are plenty of information technology stocks, as well as some of the biggest companies in the world: Microsoft Corp. ( MSFT), Alphabet ( GOOG, GOOGL), Procter & Gamble Co. ( PG) and Verizon Communications ( VZ). Expenses are 0.50 percent, or $50 per $10,000 invested annually.
Pax Global Environmental Markets Fund (PGRNX). This mutual fund has a Morningstar four-star rating. It is void of fossil fuels and focuses on "products and services that help other companies and societies improve their environmental performance." Its 47 holdings include at least 40 percent securities in non-U.S. companies, including emerging markets. Top holdings include Danaher Corp. ( DHR), East Japan Railway Co., Thermo Fisher Scientific Inc. ( TMO), French-based companies Suez SA and Legrand SA. The minimum investment is $1,000.
Vanguard FTSE Social Index (VFTSX). This low-cost fund has $2.61 billion in assets and uses an index investment approach that tracks the FTSE4Good US Select index, a socially responsible investment index of U.S. stocks. Nearly half of its 444 holdings focus on the financial and technology industries, closely followed by the health care industry including Apple Inc. ( APPL), Johnson & Johnson ( JNJ), JPMorgan Chase & Co. ( JPM) and Facebook ( FB). The minimum investment is $3,000.
iShares MSCI USA ESG Select ETF (KLD). This fund screens ESG stocks and excludes tobacco companies. Nearly a quarter of the fund focuses on technology but includes holdings in health care, industrials and consumer staples, among other industries. Holdings include 3M Co. ( MMM), Ecolab ( ECL) and Accenture PLC ( ACN). Expenses are 0.50 percent.
[See: 7 Stocks That Could Save Your Portfolio.]
TIAA-CREF Social Choice EQ Retail (TICRX). With 791 holdings, this fund, which screens for certain ESG criteria, includes a diverse cross section of sectors. Top holdings include MSFT, JNJ, PG, Merck & Co. ( MRK) and Walt Disney Co. ( DIS) only account for 13.81 percent of total assets. The minimum investment is $2,500.
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