Given the political controversy around environmental, social and governance investing, you’ve probably heard of ESG criteria. But there’s another subset of sustainable or values-based investing you might be less familiar with: impact investing.
A key difference between the two is that ESG criteria act as a framework for assessing a company’s risks from non-financial material items — like an insurer with a lot of coastal customers at risk from a rising sea level — while impact investing is more positive.
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What Is Impact Investing?
Impact investing is concerned with outcomes; in other words, it targets companies making specific impacts in communities, such as increasing the number of people with access to banking in historically underserved areas.
“At its heart, ESG is a risk mitigation screen, designed to determine how a company’s performance on social, environmental and governance factors might create vulnerabilities related to its supply chain, workforce or brand that will negatively affect its market performance,” says Jasper van Brakel, CEO of RSF Social Finance. “Impact investing aims to create positive effects on one or more of those dimensions while earning a meaningful return.”
The Brainy Insights, a market research company, estimates that the size of the global impact investing market will rise to $7.8 trillion in 2033 from $3 trillion in 2023.
“The impact investing industry continues to become more and more integrated into investment portfolios and mainstream finance as a way to meet the desires of investors to do good while doing well,” says Laura Skiles, director of impact for community finance solutions with U.S. Bancorp (ticker: USB). “Impact investing data continues to show that investments focused on social and environmental issues provide strong and growing returns as well as measurable positive outcomes.”
And in an election year where environmental and social issues will play a prominent role in the presidential debate, now may be a good time to consider how your investment dollars can make an impact in areas you feel strongly about.
“Given the economic volatility of the past several months, increased inflation, and general market uncertainty fueled by polarization from an upcoming election, now is a prime time to consider impact investments,” says Daryn Dodson, managing director of Illumen Capital.
“Bias permeates investing in material ways, and those who do the work to address these biases have a unique advantage,” he says. “In times of uncertainty, biases tend to increase. Those who can see past it and invest in companies that aim for the same societal change are more likely to benefit in the long term.”
With these thoughts in mind, let’s look at three top impact investing firms and three top impact investing funds:
— Eaton Vance Corp. (EV)
— Impax Asset Management Group PLC (OTC: IPXAF)
— Trillium Asset Management
— First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)
— Invesco Water Resources ETF (PHO)
— YWCA Women’s Empowerment ETF (WOMN)
Impact Investing Firms
Eaton Vance Corp. (EV)
When this investment management firm bought Calvert Investment Management in 2016, it acquired a company that’s been involved in responsible investing for years. Calvert was the first to launch a socially responsible mutual fund that avoided investing in companies involved with apartheid in South Africa. It launched an ESG bond portfolio
in 1987 and a non-U.S. ESG portfolio in 1992.
In 1995, it debuted Calvert Impact Capital. Now, Calvert Impact offers notes targeting community investment, carbon reduction and a more inclusive banking system. It also offers several small business recovery funds.
Calvert’s responsible mutual funds offer actively and passively managed strategies.
Impax Asset Management Group PLC (OTC: IPXAF)
This is another firm that grew its impact investing offerings through an acquisition. In 2017, it announced that it would buy Pax World Management.
At the time, Impax said it was a “combination of two pioneering firms focused on the transition to a more sustainable economy.”
Impax was founded in 1998, while Pax began in 1971. At the time of the merger, Impax said both firms offered investment products that sought to tap “rising interest from asset owners worldwide in allocating capital to high-growth sustainable investment opportunities, in investment products that take a broad view of risk, including environmental, social and governance factors, and/or that demonstrate positive, non-financial impact.”
Impax has worked with the World Bank to structure an impact bond to finance 300,000 water purifiers for schools and other institutions in Vietnam. The project aims to improve access to clean water for kids, end the use of wood fires for boiling water and give women more time that would otherwise be spent gathering wood and boiling water to purify it.
Trillium Asset Management
This ESG-focused fund provider offers impact investing strategies targeting sustainable agriculture, low-income housing, job creation and retention, Native American community development, financial services that help people avoid predatory payday lenders, environmental sustainability, development of domestic and international communities, and child care.
Trillium’s impact investing vehicles are primarily certificates of deposit and promissory notes. Certificates of deposit offer interest for depositing money for a specific amount of time, while promissory notes are instruments where one party promises to pay another a certain amount of money at a fixed time in the future, or under other terms.
Trillium’s first foray into community impact investing came in 1984, with investments in a community loan fund that helped low-income people living in a manufactured-home park form a cooperative and purchase the park from their landlord.
The firm has expanded its impact investing work domestically and internationally. It typically directs investments to nonprofit loan funds or development banks and credit unions targeting historically underserved sections of society.
Impact Investing Funds
First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)
In 2022, Morningstar put together a list of 28 equity funds that practice impact investing. At the time, this exchange-traded fund, or ETF, was the largest as well as the best-performing. This alternative energy fund tracks an index of securities issued by companies involved in advanced materials, energy intelligence, renewable electricity generation and renewable fuels, and energy storage and conversion.
At the time that Morningstar put the list together, most of the fund’s portfolio was dedicated to the impact theme of climate action, followed by resource security and then basic needs.
The $702 million fund has an expense ratio of 0.59%, or $59 per year for every $10,000 invested. It also paid a 30-day SEC yield of 1.2% as of the end of May. QCLN is up more than 60% over the past five years, though the last few years have been rough going for the fund.
Invesco Water Resources ETF (PHO)
This ETF tracks an index of companies involved in the conservation and purification of water for homes, businesses and industries.
The water investing theme has been gaining speed as the planet’s finite water sources for drinking and growing crops are threatened by climate change.
This fund was the second-biggest in the Morningstar list a few years ago, but that has changed as PHO has outperformed in its category. Most of its holdings focused on resource security and basic needs, with a smaller percentage allocated to climate action.
“The portfolio maintains a sizable cost advantage over competitors, priced within the second-cheapest fee quintile among peers,” says Morningstar, which gives the ETF a five-star rating.
The $2.1 billion fund has an expense ratio of 0.6% and is up more than 80% over the past five years. It has a 15-year annualized return of 11.2%. It also pays a small trailing-12-month yield of 0.5%.
YWCA Women’s Empowerment ETF (WOMN)
This fund was the smallest on Morningstar’s list, but it hits on a theme that is big in the impact investing community: women’s empowerment. WOMN tracks an index of companies that “have strong policies and practices in support of women’s empowerment and gender equality,” the fund’s website says.
Impact Shares donates all the net advisory profits from WOMN to the YWCA. “This provides an additional funding source for the YWCA’s mission to eliminate racism, empower women and promote peace, justice, freedom and dignity for all,” the fund states.
The $56 million ETF has an expense ratio of 0.75% and is up more than 74% over the past five years, beating its category average. Its trailing-12-month yield is 0.9%.
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6 Top Impact Investing Firms and Funds originally appeared on usnews.com
