Whether it concerns climate change, supply chains, human rights or corruption, investors increasingly seek to better understand the impact that their investments are having.
One recent Bank of America press release states that three-quarters of investors want to work with an advisor who offers investment strategies that result in competitive returns and positive impact. An even higher percentage of millennials want to make a connection between financial and societal outcomes — as high as 86 percent, according to a recent Morgan Stanley analysis.
But can investors really have a positive impact with their investment dollars while also maximizing financial returns? This is no small matter. It is more than a trillion-dollar opportunity — consider that Bank of America alone has a client base representing over $2 trillion in assets.
What makes this question difficult is that the field of impact investing hasn’t always asked the right questions when it comes to maximizing impact. What’s really needed is a paradigm shift across markets. Impact cannot and won’t be maximized if “impact investing” remains siloed to high-net-worth individuals and foundations. Impact investing needs to factor in all asset classes to be as meaningful as it can.
Consider that the 2017 Impact Investor Survey by the Global Impact Investing Network calculated the amount of money deployed into impact investing as roughly $110 billion, a tiny fraction of the $70 trillion value of public companies. Unless impact investing becomes more inclusive and more accessible to everyday American investors — U.S. mutual funds are in fact the world’s largest component of corporate ownership — we will continue to miss out on 99 percent of the impact that investing can have by affecting existing companies and markets.
While a few ratings, such as from Morningstar, have begun to ask how to have impact within public equities, those attempts miss the mark by a wide margin. In 2016, Morningstar began assigning funds a 1-5 “globes” rating, representing the approximate proportion of companies with high Sustainalytics ESG scores.
We applaud Sustainalytics and Morningstar for taking this bold leap, but merely calculating the degree to which fund managers follow Sustainalytics data comes across as self-serving, especially given that Morningstar has a 40 percent ownership position in…