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Your Guide to Impact Investing

By
The Swell Team
October 13, 2017
20 min read

When you’re just beginning to dive into the investing waters, it can be tough to navigate through the terms and ideas being tossed around. Impact Investing creates an intentional selection of holdings with a keen eye toward progress.

Impact Investing 101

What is impact investing?

Impact Investing refers to investments “made into companies with the intention to generate a measurable, beneficial, social or environmental impact alongside a financial return.”

In other words, to invest in companies that are doing brisk business and making a positive change in the world. There are two primary reasons that you might choose Impact Investing. One, you are conscious about how

your money impacts the world,

and two, you want to use your dollars to support social change. Impact Investing has historically been available only through high- net-worth financial advisors and expensive, complicated mutual funds. Everyday investors have been largely shut out of the

market, but that’s about to change. Newer finance companies aim to democratize the SRI (Socially Responsible Investing) industry by offering ethical investment options to everyone, with approachable fees and no-nonsense guidance.

DID YOU KNOW? Intentionality is key - An investor’s desire to have a positive social or environmental impact with their dollars is essential to Impact Investing.

What’s the difference between this and all the other terms out there?

SRI is a term that describes the entire socially responsible investing industry. So while Environmental, Social and Governance Investing (ESG), and Impact Investing are a part of SRI, they all work a little bit differently. There are merits to each, but Impact does it all.

  • Filter: Socially Responsible Investing - SRI filters out companies involved in harming our planet and our health.
  • Best of Sector: ESG Investing - ESG Investing screens companies for various environment, social, and corporate governance policies. No matter the sector, they want the best ESG performers.
  • Fix: Impact Investing - Impact Investing solves global challenges by investing in companies developing solutions to those challenges. 

Performance

Will I have to sacrifice returns?

Not at all. You absolutely can make an impact without sacrificing returns. Extensive academic research and empirical data have shown that socially responsible investing can have a positive impact on your returns.1

The MSCI KLD 400 Social Index is comprised of companies with high ESG ratings. Created in 1990, the index aims to serve as a benchmark for investors whose objectives include owning companies with very high ESG ratings and avoiding companies incompatible with specific values-based criteria. Good to know: If you had invested $100 in 1990, you would have $1,477 today. This index, which is the oldest ESG index in the US, has shown that ESG can create added value – by outperforming the S&P 500 for the last 27 years. Inclusion in this index is based exclusively on ESG factors.

MSCI KLD 400 Social Index
MSCI KLD 400 Social Index

DID YOU KNOW? 75 percent of individual investors are interested in sustainable investing - You aren’t alone in your good intentions - lots of people want to do good, but don’t know how. Impact makes it easy to create change.

Choosing Portfolios

Impact Investing vs. the comparative market

It’s all about diversification. Adding in stocks that have been successfully growing alongside ones poised for growth create a mix that generally weathers the ups and downs of the market.

Impact investing portfolios generally have themes that are focused on issues such as curing cancer, managing our water and energy resources, and reusing materials to prevent excess waste going to landfills and polluting water ways.

DISEASE ERADICATION

Think immunizations and research.

CLEAN WATER

Think water filters and pipe repairs.

GREEN TECH

Think electric cars and LED lights.

RENEWABLE ENERGY

Think windturbines and solar panels.

HEALTHY LIVING

Think nutritious foods and fitness centers.

ZERO WASTE

Think recycling and repurposing.

Impact portfolio performance

On average and in the aggregate, impact portfolios have performed on par with, and sometimes better than, the broader market.

According to a McKinsey & Co. report, thematic investing could yield benefits for investors because thematic strategies single out the companies that will benefit most from long-term trends. For example, when the 193 countries of the UN all agreed to move forward with the Sustainable Development Goals (SDGs), themes like climate change, energy efficiency, and health may garner long-term support. 3

Impact investing performance
Performance of Swell's Impact Investing Portfolios

DID YOU KNOW? Sustainable investing has seen a 14-fold increase since 1995 - Those are huge numbers! The Impact market is more accessible now than ever before, the time is right to get in on it.

Selection process

How are the companies selected?

For example, Swell Investing manages to combine financial expertise with a deep passion for impact.  e questions are: What is the global issue these companies are solving and are they making money?

ANALYSIS - By analyzing the global challenges affecting our environment and our health we have identified the high- impact themes that we believe will also make strong investments.

SCREENING - The companies we include are screened for a commitment to positive impact and derive revenue from environmental or social impact as part of their business.

VALUATION - Finally, we analyze each company’s financial health and valuation.

DID YOU KNOW? There are tons of different options when it comes to classes of investing - There are public equity, private equity, fixed-income, and community investment strategies available in the Impact Investing space.

The journey of a dollar

Where does my money go when I invest?

When you invest in a company by purchasing stock, you own a little part of that company. Here’s how it all works:

1. When you invest in a portfolio of stocks

When you choose to invest your money in a company, they use it to grow their business and fund new projects. Take the water technology company, Xylem, for example: They use your investment money to create newer, more innovative technology for smallholder farmers.

3. The technology helps the people who need it most

It’s a good product that works well, thanks to research and development. The demand for the the pump is high because it reduces labor time by 25% or more and allows communities to reduce their water usage by 40%.

2. You’re investing in innovation

With the money they’ve received from investors, they’ve created the Saajhi Pump – a pedal powered water pump that helps farmers irrigate their crops and increase their yield by 3 times as much compared to rain fed crops.

4. As profits increase so do potential returns

Xylem turns a profit and the value of their company increases; so, in turn, does the value of their stock. Because you own a piece of the company, you are entitled to a share of the profits. You can choose to sell your stock and reap the immediate rewards or hold on to them with faith they will be worth even more in the future. 5

Measuring Impact

What impact are the companies making?

One advantage of investing with an impact-focused company is that their portfolio managers do the heavy lifting.  ey identify the companies that are both making an impact and are poised for growth, and include them in their basket of holdings.  is marriage of purpose and profit sits at the heart of Impact Investing.

CALIFORNIA AMERICAN WATER

Reduced water use in California by 15 billion gallons 6

This utility company helped their customers reduce water use by more than 15 billion gallons over an 18 month period through social media and app integration. Saving money, saving water: A win for everyone.

TESLA

e average range you can get from a full charge in a Model X is 250 miles 9

So much more than an automotive company, Tesla is also a technology and design leader with a focus on energy innovation. An electric car emits about one third of the carbon emissions of its gasoline-fueled counterpart.

BLUEBIRD BIO

Bringing down the cost of expensive medical treatments 7

This biotech company specializes in gene therapy and aims to reduce the cost for those who need it the most. Their new payment model will save patients many, many thousands of dollars over the course of their treatment.

EDISON INTERNATIONAL

Ecobee customers saved an average of 23% on their heating and cooling costs 10

They’re modernizing the grid and partnering with industry innovators like Nest and Ecobee. Keeping your energy use low when you’re not home means saving money and resources – about 25% less.

ROYAL PHILIPS NV

Creating access to health care for mothers and babies in Kenya 8

This health technology company is creating access to health care for mothers and babies in Kenya who otherwise would have none. Their clean energy facility will decrease the infant mortality rate in sub-saharan Africa.

MOHAWK INDUSTRIES

eir products include a collection of carpets made from 100% plastic bottles 11

They specialize in waste reuse. Their products include a collection of carpets made from 100% PET plastic soda bottles and a program to repurpose

all process waste from their facilities. They’ve recycled 25 million pounds of old tires into new doormats.

Impact Investing and you

How this fits into your investment strategy

Take a look at where your money is now. Are you unknowingly supporting companies that aren’t aligned with your values? It is possible to invest with your head and heart.

It is possible to align your investments with your values across asset classes. Liquid savings, Impact IRAs, company sponsored 401k programs, and stock investments are all meant to work together. ESG and Impact strategies exist in a variety of products. By mixing up what you’ve put your money into, you’ll set yourself up for success down the road. Pre-tax, post- tax, and cash – all working together for your future.

Impact investment strategy
Impact Investment Strategy

6 things to know about Impact Investing

MARKET

e Impact market is worth $8.72 trillion dollars 12 That’s the amount invested in some type of sustainable investment strategy in the U.S. That’s more than $1 out of every $5 under professional management! 13

PERFORMANCE

You don’t have to say no to profit when you say yes to progress.

On average, Impact Investment portfolios have performed on par with, or better than, conventional strategies. 14

 PROGRESS

There’s just one mission and that’s joining purpose and profit.

Whether it’s ESG, SRI, Sustainable, or Impact – it all means one thing: Progress. The focus for all is on marrying positive financial returns with social objectives.

RESULTS

Economy and ecology working together means measureable results.

The global economy is powered by the Earth’s finite natural resources and ecosystem. Impact investors understand this and use strategies to mitigate resource risk in their portfolios.

FOCUS

Impact Investing focuses on the solution rather than the problem.

Impact investors focus on the world’s most pressing social and environmental issues and drive capital into the companies that produce products and services that are addressing those issues.

CHANGE

You can make real change by voting with your dollars.

Impact investors shift corporate behavior by moving money to companies developing solutions- based strategies to societal problems and by engaging in shareholder advocacy. Making change starts from within.

DID YOU KNOW? There’s brain power behind the decision making, not just algorithms -Impact specialists are able to assess the risks and opportunities that may arise in specific industries and companies.

I’m in, let’s do this!

So where do I go from here?

When you’re ready to invest your money, you’ll want to do it the right way.

Managing your own investments may not be right for you, and perhaps you don’t want to work with a financial advisor either. New companies, like Swell Investing, are making it easier for people to invest with their values. Dip your toe into Impact Investing with $50 or $50,000, whatever feels right to you. Low fees and thematic portfolios make it nice and easy to dive in and make a difference.

www.swellinvesting.com

Download the PDF version of this guide

1 Gunnar Friede, Timo Busch & Alexander Bassen. ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment Vol. 5 , Iss.4, October 2015.

2 Sustainable Signals: The Individual Investor Perspective, Morgan Stanley Institute for Sustainable Investing, 2017.

The S&P 500 Index, MSCI KLD 400 and Russell 3000 performance shown above is shown for illustrative purposes only. Swell’s portfolios differ from these benchmarks in that, among other factors, Swell’s portfolios are managed, primarily comprised of small and mid cap stocks, undiversified, bear fees and may vary materially in volatility. Past performance is not indicative of future results.

3 From indexes to insights: The rise of thematic investing, Mckinsey & Co. 2014. 4 US SIF, US Sustainable, Responsible and Impact Investing Trends (2016).

*The performance shown is the actual result of an investment account held by an affiliate of Swell and assuming a 0.75% annual advisory fee. Performance figures shown are net of fees and transaction related expenses and include reinvestment of dividends greater than $1. Comparison to the Russell 3000 Index and S&P 500 are shown for illustrative purposes only. Swell’s portfolios differ from these benchmarks in that, among other factors, Swell’s portfolios are managed, primarily focused on small and mid cap stocks, undiversified, bear fees and may vary materially in volatility. Past performance may not be indicative of future results.

5 Marie Von Hafften, “How a Profit Focus is Expanding Water Access: Xylem sought to ‘upend’ the traditional business model, aiming for the BoP” NextBillion.

6  California American Water Applauds Customers for Saving More Than 15 Billion Gallons During Drought, Business Wire, April 07, 2017. 7  Ruth J. Hickman, MD and James Radke, PhD, “Struggling with the High Cost of Gene Therapy”, Rare Disease Report, May 10, 2016. 8  Monty Munford, “The UN and Philips Bring Hope And Health To Africa’s Most Challenging Region” July 12, 2017. 9  Jeff Desjardins, 41 Interesting Facts About Tesla Motors, Business Insider, Oct. 1, 2016. 10  Based on an internal analysis conducted on October 2, 2013, www.ecobee.com/savings.

11 Mohawk Industries, “Mohawk Industries 2016 Sustainability Report Highlights How The Company Leverages Innovation To Push The Boundaries Of Sustainability” April 24, 2017.

12 US SIF, Sustainable Impact Investing in the United States Overview: An Infographic. 

13 US SIF, US Sustainable, Responsible and Impact Investing Trends (2016). 

14 Kimberly Gladman, CFA, PhD. Ten Things to Know about Responsible Investment & Performance. GovernanceMetrics International, 2011.

This guide is provided by Swell Investing LLC, an SEC registered investment adviser. Brokerage services provided to clients of Swell Investing LLC by Folio Investments, Inc., an SEC registered broker-dealer and member FINRA/SIPC. The information contained in this guide is provided for general informational purposes. Nothing is this guide should be construed as tax advice, an offer, solicitation or recommendation to purchase or sell any security. This guide is not intended as investment advice, and Swell does not represent in any manner that the circumstances described herein will result in any particular outcome. Investment advisory services are only provided to investors who become Swell clients. Any past performance provided is for illustrative purposes only and is not indicative of future investment results. As with any investment, there is the potential for profit and the risk of loss.

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