Understanding Socially Innovative Investing


U.S. Trust is a long-time leader in impact investing, or investing in stocks, bonds, exchange-traded funds and other investable assets, with the dual goals of making a profit and supporting societal or environmental progress. We created Socially Innovative Investing (S2I), our first impact-focused strategy, more than five years ago, and have since expanded our S2I platform to include other impact-focused strategies such as Women and Girls Equality Strategy and Carbon Reserve Free. This expansion was based in large part on the growing awareness that corporate leadership across a broad range of environmental, social and governance (ESG) criteria and strong financial performance are not mutually exclusive; rather, they can be mutually beneficial qualities. And while some companies engage in "doing good" just for the public relations value, all our S2I strategies seek to invest in companies that are doing good because it can be good business and potentially lead to better financial performance over the long run.


Impact investing is almost inevitably rooted in an investor's personal values and beliefs. And while the approach has gained attention lately, versions of it have been around for a long time. At least since the mid-18th century, when Quakers banned followers from participating in the slave trade, individuals and groups have periodically chosen to avoid investments that conflict with moral, religious, environmental or other values. However, this approach, originally referred to as socially responsible investing (SRI), is notable for what it doesn't do. That is, investors choose what industries or companies not to invest in — such as weapons manufacturers and alcohol and tobacco producers, to name a few. And, because this "negative screening" entail limiting the universe of potentially profitable investments, it has often been viewed as more of a noble endeavor than a wise investment, with the investor likely to experience lower returns. Indeed, during the 1980s, Fortune magazine famously derided SRI as "feel good" or "politically correct" investing. Noted investment economist Milton Friedman even weighed in, stating in a New York Times article that the only goal for corporate managers should be maximizing profits, while anything less was a dereliction of duty to shareholders

And, in fact, the performance experience of early social investors was mixed (at best), as portfolios often lacked appropriate diversification, fundamental analysis, and risk control. This perception was reinforced during the 2000s as a series of thematic investment strategies targeting alternative energy solutions was marketed as a new, environmentally conscious growth concept. But many of the companies were small, immature and speculative, with business models dependent upon a particular incentive program or regulatory regime. After a quick initial flurry of positive developments, these investment strategies floundered, and clients, understandably, headed for the exits. But times have changed, it seems.


With interest in social investing continuing to grow, a broader spectrum of strategies has evolved. These new approaches tend to be more active and demanding, more focused on profit and measurable impact, and based on the notion that strong ESG performance and corporate profitability are positively correlated. Enabling this expansion is an increasingly robust set of data that corporations publish in annual corporate sustainability reports. According to the Governance & Accountability Institute, over 80% of S&P 500 companies now publish such reports, up from just 20% in 2011. Government agencies are also pressing for more regular and detailed disclosure from the companies they regulate. And industry groups such as the Sustainability Accounting Standards Board are working to ensure that data are reported consistently from company to company and industry to industry. As a result, investors now have access to a rich data set on workforce diversity, carbon emissions, water/energy usage, and waste, as well as the programs companies have invested in to better their communities and make a positive impact across their ecosystem.

Why is this new source of data so important? Part of the answer lies in the changing nature of the U.S. economy. During the 1970s, most of the value accruing to public U.S. companies was represented by tangible assets: machines, factories, inventory and so forth. But as we have shifted toward an information-driven economy, and as much of the nation's productive capacity has moved offshore, tangible assets have been largely superseded by intangible assets on the balance sheets of S&P 500 companies. Indeed, in 2015, 84% of the market value of U.S. companies derived from intangibles such as brand, reputation, supply chain, employees, intellectual property and customer base.¹ Investors can no longer rely exclusively on traditional financial analysis to evaluate the risks and opportunities facing today's tangible asset-light companies. But by including environmental, social and governance factors in their analysis, investors are better able to determine which companies are also effectively managing their (increasingly important) intangible asset base.


  • Human capital engagement. How does the company treat all of its stakeholders (employees, shareholders, customers, suppliers and the community)? Considerations include hiring practices focused on diversity and inclusion (especially in leadership roles), fair and equal compensation practices, employee health and wellness benefits, human rights throughout the supply chain, and product safety and quality.
  • Environmental stewardship. What policies does the company employ for interacting with the environment? How effective are companies at managing their environmental footprint and the associated risks? Considerations include climate change policy, greenhouse gas reduction, energy consumption, water management and waste mitigation.
  • Corporate citizenship and governance. What are the standards and procedures regarding its role as a corporate citizen? How does it treat shareholders? Considerations include community engagement and investment, employee volunteerism, shareholder voting policy, executive pay and board independence.

    Measuring a company's actual commitment to these pillars involves a two-part review of stated policies and performance accountability.

  • Performance accountability review. We view progressive corporate policies and robust disclosure as indicators of good management and long-term value creation. Further, robust disclosure is the first step toward broad accountability.
  • Policy review. Because good intentions don't always result in positive outcomes, we utilize objective measures to assess actual performance against stated goals, societal norms and peer comparisons. We also consider whether companies have capitalized on external incentives for good corporate behavior, and avoided costly fines and penalties.


The S2I scoring process leverages over 400 unique data points designed to measure how effectively a corporation is engaging human capital, mitigating environmental impact and practicing good corporate governance.

When weighting the relative importance of these factors, we consider "materiality" as it applies to different industries. Materiality refers to the assessment of which ESG factors are relevant to a company's business activities. For example, we place more weight on corporate governance factors for financial services companies, carbon emissions factors for energy companies, and water management factors for utilities. These assessments play an important role in our investment process, and they produce a potential universe of stocks representing the best corporate performers across a broad range of ESG criteria. We intentionally include leading corporate performers in all sectors, even those that have poor reputations for ESG performance (like energy, materials or utilities)

Following the ESG scoring process is a fundamental review, to ensure that we are purchasing good stocks on behalf of our clients, not just good companies. This review leads to a targeted list of 80–100 stocks that are attractive from both a fundamental and a social perspective. Finally, we conduct a portfolio construction exercise designed to minimize external risk factors and provide broad diversification. The goal of this step is to allow the social scoring process to drive the relative performance of the portfolio, while neutralizing other potential market influences. The ideal result is a diversified portfolio of strong companies that we believe can deliver attractive risk-adjusted returns over a long-term investment horizon.


Continual attention, monitoring and adjustment are required to keep the S2I portfolio properly balanced to achieve its goals and deliver the competitive longterm, risk-adjusted returns that we seek to capture. We review changes in fundamentals to make sure holdings remain attractive investments. Similar assessments of ESG criteria help ensure that portfolio companies remain consistent with social goals. Stocks are sold if they fall out of the investment universe, analyst ratings change dramatically and a review indicates selling is advised, or the social innovation score deteriorates. Position sizes are rebalanced to maintain appropriate limits, sector weights and market factor exposures. Since companies' ESG performance is generally consistent over time, we are able to keep turnover low (targeting 30%–40%) in order to minimize transaction costs. However, we continually seek potential new investments by reviewing all eligible stocks on an ongoing basis.


MYTH #1:
Companies investing in leading social or environmental initiatives are sacrificing profits.

We believe that companies that demonstrate leadership in human capital, environmental stewardship and corporate citizenship/ governance have an advantage over their peers in their ability to manage risk, increase productivity and develop sustainable business models. S2I was designed to identify companies that have figured out how strong ESG performance can drive better economic outcomes.

MYTH #2:
Impact investing underperforms the broad market

The S2I methodology was designed both to identify long-term value creators and to mitigate risk. When traditional SRI strategies underperform, usually they do so because of poor portfolio construction, not social screening. Recent empirical studies have shown that strong ESG performance can predict future strong stock performance. Conversely, companies demonstrating weak ESG performance are more likely to experience less earnings growth, increased fundamental volatility and higher credit risk.2

MYTH #3:
Reliable and consistent data are not available.

The Socially Innovative Investing model addresses transparency and data manipulation by relying predominantly on third party-verified data. Our scoring process weights objective performance factors more heavily than self-reported policies. Further, as detailed above, the quality of reported data is improving each year due to investor pressure for more disclosure and efforts by organizations such as SASB that are advancing standardization. The quality of the data and the proprietary weighting methodology of our S2I scoring model form the central value proposition of our strategy

MYTH #4:
Investors cannot achieve impact in a public equity portfolio

Many investors have focused on private, local and targeted investment opportunities to achieve impact and may view public equities simply as a source of investment income to fund their philanthropic efforts. But this often leads to misalignment between the investors' missions or values and a large portion of their financial assets. We have designed the S2I strategies to help investors to bridge that gap and achieve a more holistic approach to deploying capital. Furthermore, the most effective way to have impact on an established industry is often to invest in the leaders who have the influence, resources and long-term vision to improve business practices throughout the entire value chain.

To learn more about investment opportunities and U.S. Trust's impact investing portfolios, please contact the Socially Innovative Investing Team at dg.S2I_portfolio@bankofamerica.com.

1"Components of S&P 500 Market Value," Ocean Tomo, 2015.

2See studies by Harvard Business School, Barclays Credit Research and Bernstein Quantitative Strategy.

This information is designed to introduce you to the products and services available through U.S. Trust, Bank of America Private Wealth Management, is provided for informational purposes only and is not issued in connection with any proposed offering of securities. This information is not used with regard to any specific investment objectives, financial situation or particular needs of any specific recipient and does not contain investment recommendations. Bank of America and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this publication or its contents. The information in this publication was obtained from sources believed to be accurate, but we do not guarantee that it is accurate or complete. The opinions expressed herein are made as of the date of this material and are subject to change without notice. There is no guarantee the views and opinions expressed in this publication will come to pass. Other affiliates may have opinions that are different from and/or inconsistent with the opinions expressed herein. All charts are based on historical data for the time periods indicated and are intended for illustrative purposes only. Past performance is no guarantee of future results.

This publication is designed to provide general information about ideas and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual's facts and circumstances. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial strategy.

Social impact investing is a relatively new and evolving investment opportunity that is highly speculative and involves a high degree of risk. An investor could lose all or a substantial amount of his or her investment.

Investments focused in a certain industry may pose additional risk due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.


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