September 10, 2019
WHAT ARE YOU INVESTING FOR? “My future, of course,” you might say—but increasingly people are realizing that they can invest in the future of the world as well without sacrificing potential market gains.
From 2000 to 2017, there’s been a 40% increase in assets invested in funds focused on environmental, social and governance (ESG) issues, according to BofA Merrill Lynch Global Research U.S. Equity and Quantitative Strategy. By investing in companies that operate in a sustainable fashion, supporting solutions for such challenging global issues as gender inequality and climate change, people are finding that they can make a difference. “We call that sustainable and impact investing, and there’s a growing body of data showing that it may potentially produce long-term returns that are as good as, or even better than, traditional investing,”1 says Jackie VanderBrug, head of Sustainable & Impact Investment Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank.
To test that assumption and to give graduate students experience in crafting sustainable and impact investing portfolios, the University of Pennsylvania’s Wharton Social Impact Initiative and the Good Capital Project organized the Total Impact Portfolio Challenge.2. The goal was to have each team of students craft a portfolio that met the performance and values-based objectives of a hypothetical investor. Earlier this year, 26 teams from 19 business schools took up the challenge, sponsored by Bank of America, and were assigned mentors from across Merrill and Bank of America Private Bank, who offered their expertise and acted as sounding boards.
All the teams distinguished themselves, notes VanderBrug. “The interest and enthusiasm from every one of these students only confirm my belief that sustainable and impact investing—in other words, investing that is good for both portfolios and the world—is the future.”
A 5-member team of graduate students from the University of Vermont (UVM)—all members of the school’s one-year Sustainable Innovation MBA program (meet them in the slide show, above)—built a portfolio made up entirely of sustainable and impact investments consistent with the values, time horizon, liquidity needs, risk tolerance and tax considerations of a hypothetical family office with $100 million to invest. In addition to focusing on investments that met stringent criteria for climate friendliness, they also sought to invest in better livelihoods for underserved communities, women’s education and employment opportunities, and sustainable food and agriculture.
The team gathered readily available environment, social and governance scores for each company in the funds they considered—85% of S&P 500 companies included ESG performance and practices in their annual reports in 2017.3 Then they weighted those scores by assessing how relevant the sustainability issues were to each company’s industry. The resulting proprietary rating created for each fund informed their investment decisions. While no money was actually invested, the UVM team’s portfolio earned a hypothetical return that easily beat the family office’s target return.
While she enjoyed the competition, UVM team member Alyssa Stankiewicz says she also came away with a valuable lesson: Companies with strong environmental, social and governance records have the potential to perform better than those that don’t. “The investment world is all about trying to make decisions that will set you up for the best results in the future,” Stankiewicz says. “We think that ties in really well with using environmental, social and governance factors to evaluate company and portfolio performance.” Other team members learned some important lessons about corporate governance and commitment. According to Emily Klein, “It’s not enough to have a few peripheral projects. To be truly sustainable, companies need to really embed sustainability practices into their core competencies or their core businesses.”
For Andrew Mallory, climate change was a huge motivator in wanting to learn more about sustainable and impact investing. “The good news is that, from an investing standpoint, environmental impact is the easiest measure of sustainability to quantify,” he says.
Peter Seltzer left the competition convinced that investors’ minds are bound to change as the potential returns from sustainable and impact investing become clearer to more people. “I would certainly recommend that people examine the sustainability scores of the different funds they’re investing in,” he says. “I think they’ll see a definite link between sustainability and financial performance.” Maura Kalil agrees: “The power of capital to change the world can be so strong, and it was a really incredible experience to figure out how to incorporate it into investing strategy.”
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.
Any information presented in connection with BofA Merrill Lynch Global Research is general in nature and is not intended to provide personal investment advice. The information does not take into account the specific investment objectives, financial situation and particular needs of any specific person who may receive it. Investors should understand that statements regarding future prospects may not be realized.
BofA Merrill Lynch Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.
The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management (“GWIM”) clients, is part of the Investment Solutions Group “ISG” of GWIM, a division of Bank of America Corporation (“BofA Corp.”).
Opinions are those of the author and subject to change. The investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance and investment goals. Due to the time-sensitive nature of the content and because investment opinions may have changed since the time any comments were made by research analysts, the latest Merrill investment opinion and investment risk rating for any particular security discussed should be reviewed, including important disclosures, before making an investment decision.
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