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Does making an impact mean smaller returns?

By
Hannah Glenn
August 23, 2018
5 min read
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When you invest in socially responsible companies, does that mean you’ll make less money?

Nope! Not at all, not even a little bit. In fact, if a company focuses on innovation and bettering its social good performance, its returns often outperform the market. Harvard Business School professor George Serafeim revealed that companies that have committed to undertaking truly sustainable efforts have outperformed competitors who didn’t.

Investing $1 in 1993 grew to $28 in 2013 by investing in a portfolio of firms with good performance on material sustainability issues, according to his findings. In contrast, investing in a portfolio of firms with poor performance on material sustainability issues returned just over $14 during the same time period.

One of the lingering doubts for investors who are curious about impact investing revolves around diversification. All investors love diversification – and they should! It’s hands-down the best method of risk management.

With our six thematic portfolios, it’s easy to invest in small and mid caps, but with so much innovation and progress on solving the world’s biggest issues come from smaller firms, it can be hard to be diversified. When we created the Impact 400, we devoted a huge effort into finding bigger firms that we are proud to call impact companies. We also added in some more small- and mid-cap companies to try and touch as many facets of the economy as possible.

Even if you don’t care about the environmental impact, you should care about the returns

Wellwallet says it best:

All you need to do is take a look Enron’s cooked books, Exxon’s environmental disasters, Toshiba’s inflated profits scheme, or Wells Fargo’s fake accounts scandal to see the impact of social responsibility failures. When these scandals broke, the stock price of these companies took a massive hit. Investors and company CEOs hate headline risk and will do anything to avoid it.

This is why Environmental, Social, and Governance (ESG) factors are becoming increasingly important in valuing companies. Investors are realizing that these metrics can greatly impact company value, either positively or negatively. According to Cornerstone Research, intangible assets such as human capital, intellectual property and “brand” now represent 84% of a company’s market value.  

 Money is pouring into sustainable investments, which has surged by more than $2 trillion in the last two years. Demand is growing as clients want to increasingly invest responsibly.

Researching socially responsible companies can be a daunting task, but it is possible. Earlier this year, the Yahoo Finance web page has introduced a separate tab with the ESG scores from Sustainalytics. The Sustainalytics quote page shows a company’s numerical rating for three categories, environment, social and governance, along with the overall ESG score.  Scores range from 1 to 100.

There is also a graphic representation of the score that, according to the press release from Sustainalytics, will be tracked against the average in each category and plotted over time. The graph, currently reflecting data from 2014 to now, is intended to display trends of how a company ranks against industry peers.

The page also has a chart highlighting “product involvement areas,” which reflects whether the company’s business includes products or issues such as alcoholic beverages, gambling, animal testing, controversial weapons, Catholic values, military contracting, coal and palm oil. In addition, a graph in red denotes the company’s controversy level, ranging from 0 to 5.

It is unclear how much investors can glean from the summary data, as many large companies seem to fall into a mid-range. A quick study of the Dow 30 companies indicated that 18 were “average” performers in ESG ratings, while 10 companies were designated “outperformers” and two were “leaders.” Even for their controversy scores, five had “moderate” ratings, 16 were viewed to have “significant” controversies, eight companies had “high” ratings and only one, a pharmaceutical company, was deemed to have “severe” controversies.

Swell uses a rules-based approach to stock selection. Rules-based means that Swell's thematic portfolios are constructed using a combination of qualitative and quantitative impact and financial data.

Quantitative data measurements are taken using tools like rulers and thermometers – think measuring or counting something.

Qualitative data measurements are observed using your senses. Often what matters cannot be measured, like ethics, integrity, and intentional leadership – that's the space where qualitative analysis lives.

You can learn all about our process here and select from any of our seven portfolios here.

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