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.”
And the winners are (drum roll, please)
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.
What the students learned
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.”