Why Impact Investing Makes Sense For Baby Boomers
Why Impact Investing Makes Sense For Baby Boomers
By Craig Jonas, Ph.D., CEO, CoPeace, PBC
Babyboomers.com Staff

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.

  1. It’s Good For Investors -- Impact investing creates an opportunity for portfolio diversification and it has proven to offer competitive returns.

    Morgan Stanley study compared the performance of sustainable funds with traditional funds from 2004-2018 using Morningstar data. Researchers found that sustainable funds provided returns in line with comparable traditional funds while reducing downside risk.

    Similar results were seen during the pandemic.According to an analysis published in December 2020 by S&P Global, it was discovered that as the year progressed the performance of the S&P 500 ESG Index – which includes 300 of the S&P 500 companies with relatively higher ESG scores – outperformed the S&P 500 by close to 2%.
  2. It’s Good For People and the Planet – The climate crisis is real. And it’s also clear it is an investment risk. Companies that aren’t working toward a net zero status – in which they emit no more carbon dioxide than they remove from the atmosphere by 2050 – will fall way behind the pack in the minds of shareholders, customers, employees and government officials.

    If companies don’t act now on socio-cultural-environmental issues they will no longer be viable long-term investment options for many investors. Investing in companies with positive environmental and social impact helps our planet and the people living on it by addressing and solving important problems.
  3. It’s Good For Younger Generations --In addition to funding their retirement years, many retirees have typically wanted to leave portfolios of value for the next generation. However when it comes to investing, the term “value” has evolved in the minds of younger generations. It’s moved beyond financial value to include social and environmental value.  

    The United States is on the verge of a major wealth transfer, from aging Baby Boomers to GenXers, Millenials and GenZers. ESG considerations are extremely popular with these younger demographic groups. Baby Boomers with impact portfolios will be transferring wealth that younger generations can feel good about, knowing the money is growing and making a positive difference.

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.

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