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Creating Long Term Value in Your Portfolio with Sustainable and Impact Investing

We are living in an era of growing social and environmental awareness. People and institutions are looking to make investment decisions with the goal of creating positive social or environmental impact, as well as a financial return.

WHEN INVESTING FOR THE LONG TERM, you do so with purpose. You likely invest to fund your retirement, to provide for your family and even leave a meaningful legacy after you’re gone. Critical to your investment strategy is the ability to access market returns to grow your wealth over the long-term to help you realize more of your goals.

If you also want to invest with a positive societal or environmental purpose, you may look to adding sustainable and impact investments to your portfolio. At Merrill, we define Sustainable and Impact Investing as an investment approach that intentionally seeks to avoid harm, benefit stakeholders, or contribute to solutions by considering social and environmental factors—in other words, investments designed to create positive change in society.

Many investors think creating this kind of impact with their portfolio would require some tradeoffs, such as giving up long-term growth for positive societal benefit. However, a deeper analysis of sustainable investments shows that this may not always be the case. In fact, when compared to traditional investments, sustainable investments can offer competitive risk adjusted returns for many investors. 1

Impact Investing’s Focus on the Long-Term

Anna Snider headshotWhatever the purpose you are investing for, impact investments can help you capture the long-term growth you need while also creating impact in society.—Anna Snider, Managing Director, Head of Due Diligence

Since the financial crisis, the focus on seeking immediate returns has shifted to a mindset that gives more importance to the long term potential risk and return of any given investment. This trend has been led by large, institutional investors who are now evaluating their investment decisions for their potential over many years, not just for the next quarter.

Enhanced access to company data, new investment modeling techniques and the ability to process large amounts of data means that investors can incorporate factors that go beyond traditional risk and return metrics. Now investors can evaluate their investments across a range of environmental, social and governance (ESG) factors to ascertain the impact their investments may have, not just the risk and return they may offer.

Demand for ESG data from investors also places pressure on companies to incorporate these factors into their decision making. Many companies are not only evaluating their business practices for their profit potential, but also against metrics like water and energy utilization as well as larger issues such as how their manufacturing and employment practices affect society at large.

When corporate decisions are evaluated closely, the data show that decisions that focus on maximizing profits for the next quarter can actually lead to lower long-term performance of the firm. Conversely, firms that incorporate ESG factors into their strategic decision making are more likely to deliver higher returns over the long-term. By focusing on creating lasting value these ESG-focused firms may even be able to help mitigate the impact of risks beyond their control—like droughts, high energy costs or labor unrest. 2 This is why incorporating sustainable investments into your portfolio may actually help investors capture market-rates of return and achieve potentially better long-term performance.

The Range of Sustainable & Impact Investments

Sustainable and impact investing comprises a range of investment types and all impact investments are not the same. At Merrill, we classify Sustainable & Impact Investments into four categories, each with their own unique risk-return profile:

A blue icon of two hands holding, shaping a heart.

Socially Responsible Investments
seek entities based on investors’ preferences. This approach can help maintain exposure to market-like returns but may increase risk due to lower diversification by screening out firms or industries.

A blue icon of two leaves.

Sustainable Investments
proactively choose entities that excel at a range of environmental, social or governance factors, such as promoting and achieving sustainability or leading in factory worker safety. These firms can also provide you market-like returns and potential for long-term growth.

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Thematic Investments
invest in a single environmental or social theme, such as green initiatives, gender equality and diversity or healthcare and the global trend toward obesity. These investments will likely deliver market-like returns but may exhibit higher volatility due to their narrow focus.

A blue icon of a document with a pie chart, showing data moving forward.

Impact First Investments
are dedicated to addressing specific social or environmental concerns using market-based solutions. As a result, they may not necessarily be designed to provide you with market-rates of return. While Impact First investments look for market solutions to the world’s problems, they may prioritize impact over the economic return of the investment. They do give you flexibility by providing you more choice in focus how to incorporate impact into your portfolio.

Balancing Your Investment and Impact Goals

Institutional investors and managers who work in the sustainable or impact investing field seek to balance the risk, return and impact of their investments. This same process is one that you can use as you think about potentially adding sustainable or impact investments to your own portfolio.

Key factors that investors need to balance when investing for impact
Three circles labeled Impact, Risk and Return, overlapping in venn diagram.

Jackie VanderBrug headshotMerrill research shows significant interest in impact investing, yet hesitation around actual adoption. Helping investors understand the spectrum of opportunities and unpack the misconceptions around risk allows us to support our clients to meet their impact goals.—Jackie VanderBrug, Head of Sustainable & Impact Investment Strategy, Office of the CIO

If you would like to incorporate impact into your investment strategy, while maintaining the growth potential that you need, you should focus on selecting investments that credibly combine both the intention and investment approach that you are looking for. A close examination of your investments can help you understand exactly how an investment creates impact and how it is measured and reported.

Evaluating and selecting sustainable or impact investments for your portfolio doesn’t have to be a struggle. With the right support and access to guidance from sustainable investment subject matter experts, you can easily start to incorporate impact into your portfolio.

At Merrill, we offer access to a range of sustainable and impact investment solutions, from individual investments to complete impact portfolios. We also have a team of investment experts in our Chief Investment Office who are dedicated to delivering a robust suite of investment choices to our clients.

3 Questions to Ask Your Advisor

  1. Can impact investments add value to my portfolio in the long-run?
  2. What risks do I need to consider before adding impact investments to my strategy?
  3. How can I add impact to my portfolio in an efficient way?

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1Deconstructing Risks in Impact Portfolios.” Bank of America CIO. March 2018.

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Impact investing and/or Environmental Social Governance (ESG) investing has certain risks based on the fact that ESG criteria excludes securities of certain issuers for nonfinancial reasons and therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

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