Can You Do Well by Investing in What's Good for the World?

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.”