As the bull market roared in the 1990s and fortunes were made (and lost in the tech-stock crash of 2000), there came into vogue among some investors a practice known as socially responsible investing, or SRI.
This type of investing had been around for decades. In the late '90s, it became known as "investing with a conscience." This investing philosophy involves avoiding investment in some historically profitable sectors, such as tobacco and oil companies, because their enterprises were deemed by some to be less than socially responsible. The idea is to align perceptions of investment value with one's values — to invest directly to achieve desired outcomes.
Now SRI is widely called ESG (investing for environmental, social and governance goals). A type of ESG that's developing apace these days is impact investing, a proactive investing style that emphasizes helping societies in under-developed nations and economies. This has spurred investment in companies that make micro-loans to start-ups worldwide deemed potentially beneficial to their countries' cultures and economies but that might not qualify for conventional institutional financing — a form of venture capital.
Because the negative (avoidance) side of ESG investing limits the scope of possible investment, this can easily rule out some of the most profitable companies. This has generally been viewed as a sacrifice some investors have made — forgoing potential returns — to assure that their capital isn't employed in a manner inconsistent with their social and environmental values.
The impact on portfolios has been decreased ownership among proponents' of stocks that pay regular dividends and an increase in growth companies, which typically don't. This cuts into total returns.
Today, impact investing is no longer a financial sacrifice that investors must make for moral reasons. There are abundant indications that ESG investing is no less potentially profitable than regular investing, all other things being equal and assuming a well-diversified portfolio.
Studies including a landmark investigation in 2012 have found no real difference between the results of ESG and those generated by standard portfolios in either bull or bear markets.
Some large institutional investors have found that the parts of their portfolios that have done the best have amounted to impact investments. Regardless of whether they may have been disciplined to be impact investors prior to reaping these returns, some of these investors have become de facto impact investors because it can be profitable.
An example is Ron Cordes, a former institutional investor not originally focused on impact investing, who found that positive-impact-related investments in his portfolio did so well that he increased his investment in them significantly. As Cordes and other large investors are realizing, impact investing can be good investment management.
What has changed the investment landscape to make impact investing profitable instead of the values-driven albatross it used to be?
For one thing, there are more investment opportunities for impact investors, spurred by a growing interest in companies whose goals or operations are consistent with it.
Another reason is shifting social values and a cultural sea change. As society has become more accepting of pertinent social and environment goals, so have many major corporations.