Impact Investing: Creating a Strategy


Impact investing offerssimilar, if not better, returns than traditional investing with the added benefit of creating positive social and environmental change. That being said, creating an impact investment strategy does not have to be a major shift from what you are already doing. We recommend a top-down, holistic approach to impact investing versus divesting from companies or industries in an ad hoc manner, which can lead to underperformance. At a minimum, it can mean the inclusion of environmental, social and governance (ESG) ratings in the portfolio construction process. ESG ratings offer an additional layer of due diligence which has shown to increase returns, reduce risk, and encourage companies to be more transparent with important metrics that haven't traditionally been tracked. For example, we can now analyze how vulnerable companies - and therefore, portfolios - are to changes in regulation, commodity price fluctuations, or fraud in a consistent, systematic way. As of the end of 2017,two-thirds of asset managers were in the midst of integrating ESG criteria into the portfolio management process.

ESG ratings and rating changes (known as ESG momentum) are proving to be invaluable during the portfolio construction process. Here are two examples of controversies that were proactively flagged by ESG rating agencies:

Investors can obtain free ESG rating information. To demonstrate an example, let's use "SPY", which is an exchange-traded fund (ETF) that seeks to correspond to the yield and price performance of the S&P 500 Index.

  • Go to and type "SPY" into the search field. Scroll down to the middle-right part of the page to see the Sustainability Rating, Score and Percent Rank in Category. The data is updated on a monthly basis from Sustainalytics. Read more about Morningstar's Sustainability Rating methodology here.

  • Many investment advisors have access to MSCI's ESG ratings on paid platforms, but others can view the ratings free for ETFs. For example, go to ETF.comand type "SPY" where it says "Search". Click on the first link generated for the "Free Real-Time Quote." Scroll down to see the "SPY MSCI ESG Analytics Insight" which includes the ESG Fund Quality Score and Percent Rank in Category. Read more about MSCI's ESG Rating methodology here.

There are low-cost, passive, index funds that apply an ESG screen. Here are a few examples:

Recognize that there is more to impact investing than just ESG ratings - but the ratings are a good place to start.

  • There are a variety of ESG rating providers and each has their own unique methodology. Therefore, ESG ratings may differ for the same stock on different platforms, depending on the source.

  • Likewise, Fidelity's definition of a "sustainability index" is likely to differ from Vanguard's definition of a "social index fund." You need to dig deeper to understand how their methodology and composition varies.

  • There are other, non-ESG rated vehicles that can meet your financial goals while also having a positive social and environmental impact. For example, there are cash and fixed income alternatives that will invest your money in underserved communities or micro-finance institutions domestically and abroad. There are real estate investment trusts (REITs) that focus on net zero energy buildings, affordable housing, and transitioning conventional farms to organic practices.

At a minimum, use ESG ratings as an additional tool when creating your investment strategy. It makes good financial sense to put your money with companies willing to be transparent and to make investments now - whether it is with time, capital or resources - to ensure they are well positioned for the long-term.

Work with an advisor educated on impact investing to help you create a custom strategy that meets your needs. For more information on impact investing, check out our related posts, such as Impact Investing: The Lingoand Impact Investing: The Myths.

The companies and investments listed are for illustrative purposes only and are not recommendations by Planning Within Reach, LLC. Conduct thorough due diligence before making any investment decisions and remember that past performance is not indicative of future results. No investment is without risk, including the loss of principal.

Impact Investing: The Myths

Impact investing opportunities continue to grow with one of every five dollars being invested sustainably as of 2016. Regardless, there are myths about impact investing that continue to persist, despite evidence to the contrary. For our second post in a series on impact investing, we debunk these common myths. Myth: My investment return will suffer if I implement an impact investing strategy.

Deutsche Asset Management and the University of Hamburg aggregated the findings of over 2,000 studies in 2016. Around 90% of the studies concluded there is either a neutral or positive correlation between a company's ESG ratings and financial performance. Morningstar Research completed a separate evaluation and came to the same conclusion - there is no performance penalty associated with impact investing.

Myth: Impact investing is for rich people.

There are impact investments that only accept accredited investors, individuals who consistently make over $200,000 per year or have a net worth of over $1M (excluding their residence). However, if you don't qualify as an accredited investor, you still have plenty of options. Examples include:

  • Mutual funds and ETF's that are ESG-focused
  • Green bonds which finance projects that have positive environmental benefits
  • CD's that help fund projects in your local community, such as affordable housing

Myth: An impact investing strategy simply excludes "sin" stocks or industries such as tobacco, guns, alcohol, and gambling.

Divesting from controversial stocks or industries, also known as negative or exclusionary screening, may be part of an impact investing strategy. But it is not the only tool, nor is it the most effective. When constructing a portfolio, investors should take a holistic approach that starts with documenting their values and financial goals. Next, they can identify appropriate strategies, which may include evaluating ESG ratings, divestment and engagement. Finally, investors should analyze how implementing the chosen strategy affects the risk and return characteristics of the investment portfolio. Research shows that divesting from controversial stocks or industries in an ad hoc manner can lead to portfolio underperformance and is therefore not recommended.

Myth: Social or environmental change should be the responsibility of governments and philanthropists, not of investors.

The Sustainable Development Goals (SDG's) developed by the United Nations focus on "ending poverty, protecting the planet and ensuring that all people enjoy peace and prosperity". These goals cannot be met by governments and philanthropists alone. Impact investors are filling the gap by providing capital and resources. They are also developing innovative ways to work with governments and philanthropists to advance change, such as pay for success programs. These programs accept private investors' money to expand social programs that have already proven to be effective. After an evaluation period, if the program reaches the pre-determined goals of benefiting society and generating value for the government, the government remits payment (principal and return) to the investors. If the program doesn't meet its goals, the government pays nothing.

Myth: Creating an impact investment strategy is too difficult.

While creating any investment strategy requires time and effort, creating an impact investing strategy is only getting easier as the number of available resources and vehicles continues to grow. If you want help, engage a fee-only, fiduciary advisor who is knowledgeable about impact investing and willing to take into account your values versus an advisor who insists on doing "business as usual".

Do you want to learn more about impact investing? Contact a PWR planner to learn how you can get started. For related posts, check out Impact Investing: The Lingo.

Impact Investing: The Lingo

Impact Investing is an investment strategy that seeks to create a positive social and / or environmental change while also generating a financial return. People interested in impact investing have expressed to us confusion over the many acronyms and terms used. This is our first post in a series on impact investing where we focus on demystifying the most common lingo.

ESG stands for Environmental, Social and corporate Governance. The ESG factors were developed as a way to categorize areas of impact that can be measured and compared across companies and industries. The image below shows the categories that are covered in Environmental, Social and Corporate Governance. For example, you can invest in an exchange-traded fund (ETF) dedicated to Low Carbon stocks (CRBN) or Gender Diverse stocks (SHE) to name a few. In addition to investing for positive change, there are those that believe companies leading in ESG practices are more likely to have better long-term results. Arabesque, an investment firm, dropped Volkswagen from its portfolio before the emission scandal was disclosed because VW scored poorly on the Corporate Governance factor.


SDG's are the United Nations Sustainable Development Goals. In 2016, the UN published a set of broad, global goals that are meant to be a guideline for governments, philanthropists, non-profits and others working towards positive change, such as impact investors. Some of the SDG's overlap with ESG factors, but SDG's are more broad-based goals.

SRI stands for Socially Responsible Investing. SRI seeks to integrate non-financial factors into creating a portfolio, like impact investing, but the emphasis is on excluding stocks the investor considers to be unethical from their portfolio (divestment) versus investing proactively for positive change (impact investing). An example of an SRI strategy is to exclude investments in companies that produce or promote addictive substances or behaviors (such as alcohol, gambling and tobacco) from a fund.

Impact investing and SRI are often times used interchangeably. At the 2017 SRI Conference in San Diego, one of the speakers and veterans in the industry addressed this confusion with the audience and called for practitioners to stand behind one term, choosing Impact Investing as the preferred choice. The SRI conference is still called the SRI Conference, not the Impact Investing Conference, but it is an example of how the industry is evolving and working towards creating more clarity and transparency with the terminology.

Over the next few months, we will address impact investing myths, strategies and how to get started if you want to integrate an impact investing lens into your portfolio strategy. Don't forget to ask us a question regarding this or any other topic.