Impact Investing and ESG Funds: No Need to Accept Sub-Par Returns

Half-time at the 2019 Harvard-Yale football game was different this year. On cold and sunny Nov. 23 in New Haven, Ct., protesters from both universities took over mid-field and refused to budge, soon joined by spectators (mostly young people) running down from the stands to take a stand. What they were protesting: Yale and Harvard endowment funds not yet divested from fossil fuels. Eventually, the Game resumed and Yale came raging back to win 50 to 43 in double overtime.

As investment managers, an interesting question for us is: Could the Yale and Harvard endowments have performed just as well had they prioritized investments with high ESG (environmental, social, governance) ratings? Perhaps. In our impact investing and ESG investments, we begin with the premise that one does not need to accept subpar returns. Further, in the past decade, some of the best-performing sectors have been those that score highest on ESG metrics.

Most LNWM clients who take the first step into impact investing like the intentionality of it, and from there it usually builds. For instance, a portfolio that is free of fossil fuels is a big first step. Then clients often say, “I want to do more.” Next steps could be a positive screen portfolio that includes ESG funds with an emphasis on the issues they care about, and even further, direct investment in private funds that target specific issues, such as renewable energy or affordable housing.

There is no single way to define impact investing, which over the decades has been known by many different names, including socially responsible investing (SRI) and ESG (Environmental, Social, Governance) investing. Regardless of the name, the goal is the same: To align your investments with what you value and what you think would benefit society. How do you start? To get specifics on how we partner with our clients to create impact with their portfolios, read this Q&A with Gino Perrina and Jeanne Goussev.