investing

Investments With a Social Impact

Want to put your money to good work? Socially conscious investors have a variety of new investment products to choose from.

Can your portfolio make the world a better place? Major Wall Street firms as well as much smaller organizations are rolling out new investments designed to have a positive social or environmental impact. These "impact investments" range from bonds that help fund community projects in specific cities to broad stock funds holding companies that get top marks for corporate and social responsibility.

Fund manager BlackRock, for example, last year launched the Impact US Equity Fund, which holds companies scoring high on the firm's own health, environment and corporate citizenship metrics. And nonprofit financial services firm ImpactAssets recently launched "impact investment notes" focused on sustainable farming and microfinance.

Impact investing assets climbed to $109 billion in 2014, up from $86 billion in 2012, according to the Global Sustainable Investment Alliance. People are starting to "expect more from an investment portfolio than just the financial return," says Hilary Irby, a managing director and head of investing with impact at Morgan Stanley.

But there are challenges for investors. Many investments in this niche lack a long-term track record. And the definition of "impact" can be subjective. While there are efforts to standardize how impact is measured, those are still a work in progress, says Ron Cordes, co-founder of ImpactAssets. Investors should scrutinize how each manager measures and reports social and environmental benefits.

Boost Social -- and Financial -- Returns

Impact investments are part of the universe of socially responsible investments. But traditionally, most socially responsible investments simply screened out certain stocks or industries, such as those related to alcohol, tobacco or weapons. Impact investing is "intentionally looking to make an investment that has certain social or environmental returns," says Justin Conway, vice-president of investment partnerships at the Calvert Foundation, which offers impact investments.

Socially concerned investors are gaining access to new data that can help guide portfolio decisions. Last year, for example, the Governance and Accountability Institute found that 75% of companies in Standard & Poor's 500-stock index had published a sustainability or corporate responsibility report, up from 20% in 2011. And investment-research firm Morningstar is rolling out "sustainability ratings" that grade mutual funds and exchange-traded funds on their portfolio holdings' environmental, social and governance practices.

Studies suggest socially conscious investors don't have to sacrifice returns. Analyzing seven years' worth of performance data for more than 10,000 mutual funds, a recent study by Morgan Stanley found that such funds tend to deliver slightly higher returns and lower volatility than their traditional rivals.

Fund investors can find broad impact investments, such as the new BlackRock fund, as well as funds focused on narrow themes. Both BlackRock and State Street, for example, offer ETFs tracking the MSCI ACWI Low Carbon Target Index, which overweights companies with low carbon emissions.

Fixed-income investors can choose among bonds focused on themes such as fair trade and women's empowerment. Using Vested.org, an investment platform launched by the Calvert Foundation in 2014, you can choose a specific theme, such as services for the aging. The money you invest will be lent to organizations working in that area, such as services that provide meals to homebound seniors. You'll receive annual interest payments that vary by maturity. A one-year note pays 0.5%, while a 10-year note pays 3%.

Even this relatively conservative impact investment has its risks. There's no guarantee you'll get your principal back -- although so far, the notes have maintained a 100% investor payout, Conway says.

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