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What is Impact Investing? The Benefits of ESG Sustainability

Here's how you can combine a desire to have a positive impact in the world with investing for your financial future

Market Decode: Is Impact Investing Right for You?

With Jackie VanderBrug

Investment Strategist and Co-chair of the Impact Investing Council

Bank of America Global Wealth and Investment Management

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Please see important information at the end of this program.  Recorded on July 12, 2018

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Impact Investing?

MS. JACKIE VANDERBRUG:  Hi, I’m Jackie VanderBrug with the Chief Investment Office at Bank of America.

Impact Investing is increasingly part of mainstream news headlines.  And lately, I’ve been getting more and more questions from people asking, “What is it?” and if it may be suitable for them.

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Impact Investing

Making the World a Better Place + Potential for Competitive Returns

Here’s what I tell them:

Impact investing combines the desire to make the world a better place with the goal of earning a competitive return on your investments. 

So how exactly does that work? 

Well, let’s take the first part of that definition and apply it to you….

Think about the issues that, for you, would make the world a better place.  The issues you want to have an impact on.

Let’s say you’re concerned about the environment, like climate change and energy and water conservation …

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Environmental

Or social concerns, like workplace policies that support diversity and inclusion and gender pay equity.

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Social

 

Perhaps you value companies that have strong governance policies … for example, in promoting shareholder rights, or having a diverse board of directors.

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Governance      

These issues, or others that reflect your personal values, can now be factored in when you make your investment decisions through a framework called E-S-G…

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Environmental, Social & Governance

… for Environmental, Social and Governance. 

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Sustainable Practices

In recent years, this framework has become a way for investors of all kinds to measure a company’s progress in implementing sustainable practices.  And more and more companies are realizing its value—and providing information to investors on their progress.

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ESG

Think of this framework as a diagnostic tool for impact investing.  

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ESG

Just like a doctor will use an X-ray to help make a clinical decision, ESG provides additional information that you … and investment firms can use … to gain deeper insights on the inner operations of companies.

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Investment Funds Incorporating ESG Factors 1995-2016

Source:  US SIF Foundation, as of 2016.

In the past 20 or so years, the number of investments funds that utilize ESG data has risen dramatically.

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Stocks Bonds

 

And they can cover all the major asset classes, including stocks and bonds, and different countries and regions too.

And here’s where the second part of our definition comes in: The goal of making a competitive return.

There is growing data showing that impact investing may potentially produce long-term returns that are as good as … or even better than “traditional” investing.

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Equity Strategy Focus Point

ESG:  Good companies can make good stocks

Source:  ESG:  Good companies can make good stocks, BofA Merrill Lynch Global Research, Dec. 18, 2016.

Findings from BofA Merrill Lynch Global Research show that companies with high ESG ratings tend to be healthier financially, and less likely to go bankrupt, than those with lower scores.   

It also found that ESG is a strong predictor of a company’s future earnings performance.

That means there’s a link between companies’ sustainable practices and their overall financial health. 

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Impact Investing:

•             Not short-term approach

•             But good behavior can be good business

•             With potential to earn competitive return

Keep in mind that impact investing is not a short-term approach.

Big changes don’t happen quickly … and companies understand it may take a while for the practices they implement today to see results.

But if the idea of investing in companies that are doing well while doing good with the potential to earn a competitive return is appealing to you, then impact investing may be worth exploring.

IMPORTANT INFORMATION

All sector recommendations must be considered in the context of an individual investor’s goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.

Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

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.

An investor could lose all or a substantial amount of their investment. Investing involves risk including possible loss of principal.  Asset allocation, rebalancing and diversification do not ensure a profit or protect against loss in declining markets. Past performance is no guarantee of future results.

The views and opinions expressed are those of the speakers, were current as of July 12, 2018 and are subject to change without notice at any time, and may differ from views expressed by Merrill Lynch, U.S. Trust or other divisions of Bank of America Corporation. These discussions are provided for informational purposes only and should not be used or construed as a recommendation of any service, security or sector.

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.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. All sector and asset allocation recommendations must be considered by each individual investor to determine if the sector is suitable for their own portfolio based upon their own goals, time horizon, and risk tolerances.

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THE IDEA OF IMPACT INVESTING has been around for several decades, but it used to mainly involve “negative screening,” or avoiding investing in companies and industries whose products or practices you didn’t agree with. It has changed a lot since then; today, impact investing can be thought of as investing in companies, organizations and funds with the intent of generating social and environmental change as well as financial returns. And the idea is gaining traction.

As of 2017, more than 1,000 investment funds—including mutual funds and exchange-traded funds—had incorporated environmental, social and governance (ESG) factors into their investment process, up from just 55 funds in 1995.1 And more and more companies are responding to growing investor interest. As the graphic below shows, in 2011, only 20% of companies in the S&P 500 published annual reports on their ESG performance and practices.  In 2017, that number had jumped to 85%.2

Chart detailing the growth of ESG in Fortune 500 Companies

What’s more, recent research suggests that investors don’t have to sacrifice long-term growth when investing for impact. “There is growing data showing that impact investing may potentially produce long-term returns that are as good as, or even better than, traditional investing,” says Jackie VanderBrug, investment strategist and co-chair of the Impact Investing Council at Bank of America Global Wealth and Investment Management, in the above video.

“It just makes sense,” she adds. “Companies that are driving efficiency in water, waste and energy can help lower their costs, and better workplace policies may lead to more employee engagement and stronger revenues over the long term.”

To learn more, speak with your advisor. 

Impact investing and/or Environmental Social Governance (ESG) investing has certain risks based on the fact that ESG criteria excludes securities of certain issuers for nonfinancial reasons and therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.  

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