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Impact Investing: Using Your Dollars to Make Change

Instead of shunning companies that don't adhere to their values, some investors buy shares with the express goal of effecting change.
June 7, 2018
Investing, Investing Strategy
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Maybe you’re the sort of person who participates in boycotts, deletes an app or protests a company because of an issue you’re passionate about.

But what if you invested in the company instead?

It may seem counterintuitive, but one way to effect change is through impact investing — investing in a company with the goal of advancing environmental, social or governance (ESG) topics. Instead of shunning a company that doesn’t adhere to your values, you can buy shares of that company (typically via mutual funds) and suggest changes or propose resolutions that will be voted on by other investors.

And when money talks, corporations often listen. Impact investing is part of the broader socially responsible investing universe and has resulted in some big changes.

Here’s what you need to know about impact investing — and some recent success stories.

‘Investing for a double bottom line’

Capitalism and compassion are unlikely bedfellows, but making money doesn’t have to come at anyone’s expense. Socially responsible investing appeals to investors who want to align their money with their values.

You have to recognize you’re going to own companies that aren’t perfect.

Tim Smith, Director of ESG Shareowner Engagement at Walden Asset Management

Impact investors see opportunity in having a proverbial seat at the table. By investing with a goal to have their voices heard, people realize their money can have a broader impact, says Tim Smith, director of ESG shareowner engagement at Walden Asset Management, a Boston-based portfolio management firm for socially responsible investors.

“You have to recognize you’re going to own companies that aren’t perfect,” but by investing with mutual funds that represent your point of view, you may be more successful in making an impact, Smith says. “When you’re investing for a double bottom line, the goal is to have profits for yourself but also to have an impact on the planet and our society.”

Pushing for climate change awareness

Mutual funds historically have led the charge in investing for impact, but more participation by the world’s largest asset managers could have a noticeable effect. Last year, BlackRock and Vanguard were among shareholders that voted to instruct ExxonMobil to report on the impact of global climate change policies.

In a letter to CEOs earlier this year, Laurence Fink, founder and chief executive officer of BlackRock, cited the asset manager’s responsibility to be “active, engaged agents” on behalf of clients. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” he wrote.

Walden Asset Management has been engaged in such action for several decades, and Smith points to a recent success story with Colgate-Palmolive. The company already was doing a lot of work on climate change when Walden proposed setting a science-based target for reducing greenhouse gas emissions. A few months after those 2014 discussions, Colgate-Palmolive announced a target to reduce its emissions by 25% by 2020.

While many companies ignore investor requests altogether, any type of engagement — ranging from a resolution that passes or informal discussions — can prompt companies to be more proactive, Smith says. “This can be quite an important tool for change.”

Taking aim at gun violence

Since the February school shooting in Parkland, Florida, several shareholder initiatives have targeted gun sales. In May, a majority of shareholders of firearms maker Sturm Ruger approved a resolution asking it to report what activities, if any, it’s taking to promote gun safety. Meanwhile, Calvert Research and Management urged Kroger, the parent company of several supermarket chains, to change its firearms sales practices at Fred Meyer stores. The company responded by announcing it would stop selling guns to buyers under 21 and eventually halt firearms sales.

Closing the pay gap

Investors can play an important role when they focus on topics with broader societal implications. Their voice has become “increasingly critical” because public policy isn’t effectively addressing issues of business risks or opportunities, says Natasha Lamb, a managing partner and portfolio manager at Arjuna Capital, a Durham, North Carolina-based sustainable-investment advisor.

“We’re at a point when everyone is asking, ‘What can I do?’” Lamb says. “You can take your money, dust off the cobwebs, look at what’s there and what you’re invested in and use that power of money to press for change.”

» Read more: How to invest in stocks

Take your money, dust off the cobwebs, look at what’s there and what you’re invested in and use that power of money to press for change.

Natasha Lamb, managing partner and portfolio manager at Arjuna Capital

Lamb points to a current hot topic, gender pay equity, as a recent success for her firm. In 2015, Arjuna began a campaign to get the major tech companies to publish their gender pay gaps and commit to closing them, a proposal that six companies had followed by 2016. Lamb and her colleagues rolled out a similar campaign among the biggest banks, and in response, Citigroup became the first U.S. bank to provide its gender pay gap in January.

Investors often are the first to raise concerns about a topic. For example, Arjuna was engaging with Google about its gender pay gap a year before the Department of Labor began investigating the same topic. Similarly, Arjuna had pushed Facebook to curb so-called fake news more than a year before the Cambridge Analytica scandal.

“Investors can be really critical canaries in the coal mine for these kinds of unmitigated risks or opportunities,” Lamb says.

How to make your own impact

Stock ownership gives you a voice in the management of a publicly traded company, and you can vote your shares by proxy at the annual meeting. But few individual shareholders take advantage of this opportunity. A study found that only 27% of retail shareholders voted their shares during more than 1,000 annual meetings held between July 1 and Dec. 31, 2017.

Investors create a lot of impact now and they have the potential to create more, especially if more individuals start to participate.

Gabe Rissman, co-founder of Real Impact Tracker

Start by reading the proxy materials you receive — and voting your shares. While you may be tempted to try your hand at filing a resolution, investing your money in funds with a track record of success on the impact front will increase your odds of achieving results.

That’s where Gabe Rissman hopes to be a resource. He’s co-founder of Real Impact Tracker, a New Haven, Connecticut-based company that scores and ranks funds based on the fund manager’s impact.

Find funds with a history of engaging companies on topics that matter most to you. Or tell the company managing your money that you want it advocating on your behalf. If you find other socially responsible investing strategies more appealing, you’ll find a broad range of exchange-traded funds and mutual funds to express your values. (Looking to get started? See our picks for best brokers for socially responsible investing.)

Finally, don’t be fooled into thinking you can’t make a difference. While a student at Yale University, Rissman co-headed a student-run socially responsible fund that filed a shareholder resolution in 2016 calling for ExxonMobil to disclose its lobbying activity. It was the first time a student-run organization had filed a shareholder resolution, and while it didn’t ultimately pass, Rissman says: “Not in any way would I call the effort a failure.”

And additional voices are welcomed, Rissman says. “Investors create a lot of impact now and they have the potential to create more, especially if more individuals start to participate.”

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