By Michael Lent, Partner, CIO

US SIF: The Forum for Sustainable and Responsible Business released its 2016 Biennial Report on US Sustainable, Responsible and Impact Investing Trends, and there was much good news in it.

The report, issued on Nov. 14, found that over $8.72 trillion in assets – or one in five dollars invested under professional management in the US – are now invested using sustainable, responsible and impact investing criteria.  This total is up 69% from 2014.  There are now hundreds of investment options across all asset classes a trend that has been growing substantially over the past several decades.

This is truly remarkable, but it wasn’t so long ago that things were very different.

When I began my career, Impact investing was in its infancy.  I remember attending a Council on Foundation conference in 1995 with a dozen foundation representatives discussing what we called back then, “Socially Responsible Investing.”  Twenty-one years later, I spoke on a panel at the Mission Investors Exchange conference, presenting to several hundred foundations and close to five hundred attendees focused exclusively on impact investing.

In the intervening 20+ years, Impact Investing went mainstream. Institutional investors are incorporating ESG (Environmental, Social and Governance) factors into their investment process, and traditional investment management firms are increasingly offering ESG investment options.

At the same time, companies around the globe are rapidly integrating sustainability into their core business models to increase their competitiveness, innovation and lower risks. We are moving from a time of carrot and stick approach to corporate change.  Increasingly we have sustainable companies receiving investments from impact investors.  This is a virtuous cycle and it is important to put into perspective how far we have come. We’ve come a long way.

Underlying Trends

In my view, three key trends were made abundantly clear in this report.

First is the rapidly growing interest in climate investing. More than $2.15 trillion of institutional assets apply climate change criteria.  This is a manyfold increase, and it reflects a growing awareness among large institutions about climate change risk.  Institutional investors’ increasing focused on this issue could lead companies to track their carbon output, to identify ways to lower it, and to provide innovative, low-carbon products and services.  It is one reason to have optimism about the future of the planet, despite the recent election results.  As a strong supporter of climate change solutions, we help many clients divest from carbon intensive industries and invest in other solutions.

Second is the growth of the community investing field.  The assets invested in Community Development Financial Institutions have doubled from $60 billion to $120 billion in two years.  These are the credit unions, banks and community loan funds that provide financing for critical affordable housing, social services, and small businesses in low-income communities and communities of color.  Historically, CDFIs have received most of their funding and capital from public sources or from banks and insurance companies under the Community Reinvestment Act. On a very hopeful note, private investors significantly increased their assets in community investing. There are great social, environmental and economic challenges in low-income communities. Access to capital is essential to long-term change in these communities.

Third, while a significant number of managers and investors say they are implementing ESG, it is not clear exactly what that means.  As an industry, there is definite room for improvement and transparency. Today, many managers are not specific about how they integrate ESG factors into their investment process. This vague application of ESG criteria is due to the lack of deliberate investment process. Some funds and managers want to be seen as “doing ESG investing to respond to client demand,” but are unsure of what to do.  For investors, you cannot simply pick an “SRI” fund and be satisfied that it actually has social impact. You must also understand what the manager is really doing to create impact.

Where We Go From Here

Looking ahead, I think the US SIF Trends report brings up four things we should think about:

• While we have made great strides in offering more investment options, we still need more investment solutions across different impact themes, such as Gender Lens Investing, sustainable real assets, and on broader ownership strategies.

• We need greater transparency from ESG managers and funds, so we can understand if they are actually having any impact. It’s not enough to say we do SRI. Investors need to know what and how managers are creating impact.

• Investors shouldn’t underestimate the importance of finding a wealth manager or advisor who understands the impact field. There is a fair amount of complexity and a need to sort out the managers and funds that best fit your specific financial and impact goals.

The good news is that we’re making real progress in changing the way people and institutions invest.  Together, we can keep it going and bring about even more positive change.

To read Veris white papers on climate change, gender lens investing and other topics, please visit the Research section of our website.

Photo Credit: Ronald Tagra

by Jane Swan, CFA, Senior Wealth Manager

In an election year with no shortage of drama and surprises, the market has been relatively calm and steady. Market volatility often increases during an election year as uncertainty looms over the potential market impact of a new administration. We saw this clearly most recently in 2008. The risk in an investment is considered higher when there is potential for something unpredictable to happen.

Election Year Stock Market Volatility Measured by the VIX

Chicago Board Options Exchange

The brief period of high volatility came not from changes in US election forecasts but from the somewhat surprising Brexit results. The lower volatility going into the U.S. election and the steady growth of equity markets in the first three quarters of the year may leave little room for the post election bounce often experienced.

There are no negative numbers to report across major asset classes for the quarter, either fixed income or equity. Low volatility and steady growth contributed to a 2.5 percent increase in the S&P 500 (U.S. large cap) bringing year-to-date growth to 7.8 percent. The Russell 2000 index (U.S. small cap) was up 9.1 percent for the quarter, 11.5 percent for the year. International markets continued to recover from the second quarter Brexit vote with the MSCI EAFE (developed international markets) up 6.5 percent for the quarter, bringing year-to-date to a positive 2.2 percent. Emerging markets were the best performing asset class, up 9.2 percent in the quarter and 16.4 percent for the year.

3^rd Quarter  and YTD Growth in Key Asset Classes

PMC Capital Markets Flash Report for periods ending Sept 30, 2016

Investment grade domestic fixed income markets were the beneficiary of greater market uncertainty earlier in the year. The low volatility of the third quarter was reflected in very quiet returns to fixed income. U.S. Treasuries returned 0.5 percent in the quarter, bringing year to date returns to 5.8 percent. Corporate bonds were up an even smaller 0.2 percent for the quarter, 4.2 percent year-to-date. Municipal bonds were up just 0.1 percent for the quarter, 3.3 percent for the year-to-date. Outside of investment grade, low volatility contributed to a continued surge from high yield with the index up 5.6 percent for the quarter, 15.1 percent year-to-date.

3^rd Quarter and YTD Returns by Industry Sector

PMC Capital Markets Flash Report for periods ending Sept 30, 2016

Sector returns for the quarter trimmed gains from earlier in the year, but left all sectors of the economy in positive territory for the year. Strongest growth in the quarter came from technology which completely recovered from what was a negative first half of the year. While the energy sector remained the strongest sector year-to-date (up 19 percent for the year), the price of oil hit a plateau during the quarter. The results were a 2 percent increase in energy stocks prices for the quarter. Utilities and telecom remain among the greatest contributors to growth for the year despite negative returns in the third quarter.

Price of Oil

Federal Reserve Bank of St. Louis

At this time, pollsters have high conviction in the outcome of the presidential election with the greatest uncertainty residing in the outcome of congressional, as well as state and local elections. Less certain is the path towards reconciliation of a deeply divided population. As economists ponder the catalysts to our political divisions, they will point to a shrinking middle class and its stagnant income growth. This is well illustrated by a comparison of two different definitions of ‘average’ Income. The chart below shows historical growth rates of average (also known as “mean”) and median family incomes. The average family income considers all family incomes and takes the mathematical average per family. The median stacks all family incomes and for each time period, finds the number in the middle of the stack. The median measure is often considered a better measure of the typical family because it is less biased by extremely high incomes. The graph below demonstrates this difference. While average incomes have grown considerably since the economic downturn, the typical (median) family had no actual growth in incomes over the last 8 years.

Mean and Median Income

Federal Reserve Bank of St. Louis

As they seek to repair our fraying social fabric, we invite the incoming administration and congress to apply the lessons we have learned from various approaches to impact investing. Gender lens investments, for example, demonstrate the improved decision making capabilities of diverse teams.  Men and women working together are more likely to incorporate a broader array of risks and opportunities in their problem solving. Enhanced innovation is more likely when we tap the collective wisdom of people of different races, nationalities, religions, sexual orientations, gender identities, abilities, sizes, and generations. Businesses developing technologies for mitigating climate change have the potential to drive future economic growth. Addressing access to capital in under-resourced communities has the potential to alleviate systemic economic inequality.

In short, impact investing is emerging as a ‘proof of concept’ that diverse and balanced teams are far more likely to deliver our ultimate goals:  inclusive and prosperous economies thriving in healthy and sustainable eco-systems.