Making Values Accessible: Impact Investing at Low Cost

Once primarily the domain of endowments and not for profit organizations, individual investors are embracing impact investing to align their investment dollars with companies that echo their values. It has evolved from a practice of excluding investments in so-called ‘sin stocks’ to one that selects companies based on their commitment to achieving societal good. Examples include perpetuating a green environment, adhering to ethical business practices, maintaining good corporate governance, and fostering diversity in the workplace, to name a few.

As they articulate to clients the five pillars of value—financial planning; asset allocation; investment selection; systematic rebalancing, and tax management—successful advisors recognize impact investing as a notable component of asset allocation and investment selection. And it requires a structure that affords implementation options for all levels of clients. Furthermore, data suggests that advisors can potentially benefit by incorporating impact investing into their clients’ portfolios1.

High net worth individuals can make impact investments through separately managed accounts (SMAs), which provide the traditional aspects these investors expect: manager due diligence, investment selection, tax management, reporting, and performance measurement. They are inured to the high-touch services and fee structure associated with the SMAs.

Other clients seeking impact investments want the features of SMAs, but at a lower cost. Quantitative impact portfolios address their needs by combining risk-based solutions grounded in capital markets assumptions and asset allocation methodology. They are designed to track an index, such as the Russell 1000 or 3000, and comprise individual securities selected for their high-sustainability scores.   Clients essentially enjoy the best of both worlds: a quantitative process, asset class exposure, high-conviction managers committed to sustainability, a tax management overlay, and low tracking error.

Quantitative impact portfolios fulfill a valuable niche by granting access to comprehensive, diversified strategies in the sustainability space. Built on a foundation of fundamental theory, security selection dedicated to high sustainability, and disciplined execution, the portfolios offer professional management and risk characteristics that can be tailored to help match a client’s particular risk level, social values, and desired returns, delivered at a lower cost.

The investment process fosters security selection filtered through quantitative components and key themes. Data research and analysis in the impact investing space is offered by firms such as Sustainalytics and MSCI, who conduct research and analysis to deliver sustainability scores on 5,000 global securities. The data is then further refined to identify companies committed to specific initiatives. These can run the gamut, ranging from diversity (how a company treats minorities) and fair trade (opening up markets to emerging countries), to climate concerns (carbon emissions, limiting fossil fuels, clean water).

The aim of impact investing centers around clients’ desire to direct their investment dollars into companies whose products and services can, to a large degree, parallel the causes and societal improvements they hold dear. However, one question that frequently surfaces relates to how impact portfolios have performed relative to non-impact investment choices. Several studies2 have been conducted comparing the performance of impact versus non-impact based investing, and the results show that impact investments have outperformed in the past. In fact, a recent examination of impact vs. non-impact SMA portfolios on Envestnet’s platform showed that the impact SMAs outperformed over a full market cycle by 15.45%, or 1.61% on an annualized basis3, thereby challenging an often-held theory that investing to do well and do good are mutually exclusive.

That point is further illustrated in Figure 1, which shows a tighter spread between impact portfolios’ best- and worst-performing funds than for their respective non-impact counterparts. In addition, the impact holdings universe is more homogenous in both risk-adjusted and total returns, and in its risk exposures.

Figure 1: Cumulative total return distributions & differences for various deciles of impact and non-impact funds4

Source: Envestnet | PMC Quantitative Research, 2014. Data used represents entire domestic equity universe of SRI and non-SRI mutual funds from Morningstar Direct Open End Funds database.

Technology is on the horizon to deliver more explicit performance measurement. For example, clients will be able to view their portfolio returns expressed as the percentage attributed to environmental issues versus that for developing cures for particular health issues.

Today’s advisors face growing challenges: robo advisors, whose value proposition is low-cost, index-based solutions; the push toward goals-based investing; a growing array of low-cost investment products; and being tarred, at times, with the brush of Wall Street greed. To meet these challenges, advisors must strive constantly to differentiate themselves, and impact investing is a way to do it. It can open a dialogue with clients about how they can use their investment dollars in a positive manner through the pursuit of being thoughtful, global citizens, and serve as a model to encourage their children to think about long-range social issues.

Millennials are a significant and expanding segment of the investor base which figures heavily in the impact space. Watching the meltdown of their parents’ portfolios in the Great Recession has helped inform their investment values. Their goals often embrace creating a greater societal good, rather than merely generating alpha. Although mutual funds with low account minimums serve them now, savvy advisors will want to cultivate this group: Impact investing can offer entrée to these clients who can evolve into long-standing relationships in the future.

As impact investing gains even more traction, similar quantitative portfolios for clients with at least $100,000 are in the pipeline, and will extend a menu of 50 different screens from which to choose. For example, clients will be able to select portfolios with up to three themes, giving them more customization and equipping advisors with the ability to engage in deeper client interaction.

Impact investing is a markedly significant component of today’s investment lexicon, and quantitative portfolios, marshaling professional management, disciplined methodology, and a lower cost structure represent viable solutions to meet clients’ needs for participating in this singularly important and growing space.

As Director of Product Management at Envestnet | PMC, Mr. Tagal oversees all product management and development for PMC’s suite of product and service offerings, including PMC’s managed portfolios, consulting, and research offerings. He also participates in the overall leadership and management of PMC, from a strategic positioning standpoint. 

For more information on impact investing, please visit You may also contact an Envestnet | PMC consultant to learn about custom portfolio solutions for your clients or enhancing your firm’s wealth management program.

1 Source: ENVESTAT, Volume 4, Issue 4, March 8, 2016. Data from impact and non-impact SMA portfolios, consisting of funds managed by PMC and/or third-party fund strategists, on the Envestnet platform during 2013, 2014, and 2015.

2 Examples of studies conducted by Harvard Business School “The Impact of Corporate Sustainability on Organizational Processes and Performance” by Robert G. Eccles, Ioannis Ioannou, and George Serafeim, 2013; Osmosis Investment Management, “Sheer sustainable pleasure” Resource Efficiency Case Study Series, January 2013; and Envestnet | PMC Quantitative Research, 2014 (footnote #3); see also performance data for MSCI KLD 400 Social Index for SRI vs. S&P500 index from 2001-2013.

3 Source: ENVESTAT, Volume 4, Issue 5, March 22, 2016. Data from impact and non-impact SMA portfolios, consisting of funds managed by PMC and/or third-party fund strategists, on the Envestnet platform from 2007 to 2015.

4 Source: Envestnet | PMC Quantitative Research (2014), “How and Why SRI Performance Differs from Conventional Strategies”. This paper received an Honourable Mention for the 2014 Sustainalytics Prize for Excellence in Responsible Investment Research.

Author’s disclaimer: The material contains the opinions of the author as of the date of writing and is subject to change at any time without notice. The information, analysis, and opinions expressed herein are for informational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet | PMC® makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

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