Many of today’s older investors likely have investments in assets that are not aligned with their values, and a lot of them may not even realize it. These investments might be in companies that are doing well financially but are negatively impacting society and the environment.
It’s a situation that’s completely understandable. For decades, businesses have viewed their mission as simply to maximize shareholder value. Similarly, investors and financial advisors have traditionally just focused on investing in companies with a history of delivering competitive returns, without considering anything else.
But during the last decade, things have really started to change. Investors have started to look at the “true cost” of doing business for companies they’re evaluating. They want to know what a company’s total impact on society is, not just whether a given company is making a consistent profit and delivering strong returns to shareholders year after year.
The true cost of doing business considers all stakeholders, not just the company’s shareholders. And it considers the societal and environmental impact of a company’s operations. It includes negative impacts such as air and water pollution, excessive carbon dioxide output, unfair or illegal labor practices, etc.
On the other side of the ledger are the companies that positively impact the planet and the people that live on it.
Investors who consider factors such as these – and, of course, the financial performance – or potential – of a company – are typically called impact investors in today’s parlance. Impact investors have moved beyond a strict economic perspective when it comes to investing and are increasingly emphasizing aligning their investments with their values. They want their investments to not only help fund their retirement years, and other objectives, but to make a positive difference from a social and environmental perspective.
As the CEO of an impact investing holding company, many investors – especially older investors – have asked me if they have to give up strong financial returns when they invest in impact companies.
The answer is no, you don’t have to give up strong financial returns in order to invest in companies that are doing good things for society and the environment. As Warren Buffet has said, “Good profits simply are not inconsistent with good behavior.”
So, how does an investor find companies that are doing well financially and also positively impacting society?
One approach is to invest in Certified B Corporations, a new type of business classification that balances purpose and profit. B Corps are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.
Beyond B Corps, impact investors typically examine environmental, social and governance (ESG) criteria to help choose companies to invest in. ESG investing involves considering environmental, social and governance issues, in addition to typical financial metrics, when evaluating potential companies to invest in. ESG metrics help separate stocks and funds that are truly sustainable investments from those that are simply greenwashing, i.e., organizations and funds that are simply trying to present a socially and environmentally responsible public image.
Environmental criteria consider how a company performs as a steward of our natural world, e.g., in dealing with pollution and climate change. Social criteria consider employee relations, working conditions, community involvement, health and safety factors, etc. Governance deals with a company’s leadership, how it polices itself, executive pay philosophy, any corruption or scandals, board diversity and structure, etc.
Environmental, social and governance (ESG) investing is surging and now makes up 33% of total U.S. assets under management.
The upward impact investing trend makes sense in multiple ways.
Impact investing certainly isn’t going away. In fact, it has become increasingly popular during the pandemic. From January through November 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019.
Investors are continuing to find it truly is possible to build one’s net worth while investing for good.
Craig Jonas, CEO of CoPeace (https://www.copeace.com), is a lifelong entrepreneur with success across business, academic, and athletic industries. He has over 30 years of experience in management with a passion for teambuilding and drawing individuals with big ideas together.