Social finance: where wealth and values meet

Investors who adopt social finance strategies don’t have to sacrifice returns in order to feel good about the makeup of their portfolios or to effect meaningful societal change.
Investors who adopt social finance strategies don’t have to sacrifice returns in order to feel good about the makeup of their portfolios or to effect meaningful societal change.
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The term “social finance” means different things to different people. Often, those words bring to mind the avoidance of so-called “sin stocks”—shares of companies involved in the manufacture or distribution of tobacco or alcohol, or shares of gambling enterprises. But the term encompasses much more.

Social finance offers investors ways to realize competitive returns through investments designed to achieve meaningful societal or environmental impact. Investing in socially and environmentally conscious ways is growing in popularity with all types of investors. In fact, sustainable, responsible, and impact investing accounted for $22 trillion in global assets at the end of 2014.1

By understanding what drives investors toward social finance, investors and their families can better align their wealth with their personal values and implement various social finance strategies designed to reach their own financial, legacy, and philanthropic goals.

What is Social Finance?

Social finance is any investment activity that generates financial returns for investors and has a positive societal and environmental impact.

With a growing awareness of social finance in the US, investors who want to have a positive impact on society are no longer limited to doing so through donations to charitable and other non-profit organizations. Social finance offers ways for investors to extend their influence by aligning their goals for public good and positive impact with their desire for wealth accumulation and legacy gifting.

Underneath our broad umbrella of social finance (which may differ somewhat from other industry frameworks), there are four key strategies with varying styles, focuses and degrees of impact: responsible investing, environmental finance, development finance, and impact investing.

Why do investors adopt social finance strategies?

Decisions to explore or adopt social finance strategies are not necessarily driven by charitable intent, nor do those decisions always stem from a desire to earn attractive investment returns. These decisions are often based on the following motivations:

1. Personal Values

For some individuals, deciding to invest in a socially-responsible manner stems from strongly held personal beliefs. Their primary focus is to avoid advancing the interests of organizations or industries that go against those beliefs. For example, some investors are drawn to mutual funds that will not invest in tobacco, firearms or gambling enterprises because these industries are contrary to the investor’s values.

2. Fiduciary Obligations

Trustees for non-profit organizations, retirement plan sponsors or others investing in a fiduciary capacity may search for investments that meet ESG criteria as part of their risk management strategies and fiduciary obligations.

Generally speaking, these individual and fiduciary investors seek competitive investment returns while investing in a manner consistent with their personal values or fiduciary mandate. Potential social or environmental change is not a primary focus.

3. Environmental, Social and Governance (ESG) Goals

Some social finance investors want to incorporate values-based investing with altruistic intent, seeking competitive returns from investments with a broad focus on ESG opportunities. Others may want to narrow that focus, selecting investments that further very specific environmental or social goals. One such example is a mutual fund that invests in emerging markets infrastructure or in clean-energy initiatives.

For investors who care deeply about an investment’s societal or environmental goal, investment returns may become a secondary consideration to the charitable mission.

4. Competitive Investment Returns

In addition to using social finance for personal or fiduciary-driven motives, many investors also seek competitive investment returns. Fortunately, achieving competitive performance and even outperforming non-social finance investments seem to be realistic goals.

According to a 2015 study by the Global Impact Investing Network, investors reported that their portfolio performance overwhelmingly met or exceeded their expectations for social and environmental impact and financial return.

Of course, past performance is never a guarantee of future results, and the performance of one social finance strategy is not necessarily correlated to another. Still, the data indicates that investing responsibly and outperforming the market are not mutually exclusive objectives.

5. Connection to the Next Generation

Social finance allows investors and their families to clearly identify shared values and goals and align them across areas of mutual interest. Because younger generations may want to put a greater focus on sustainable investing to achieve social and environmental impact, social finance is also a great way to bridge the gap between generations.

BNY Mellon Wealth Management

can serve as a valuable resource in helping investors identify and understand which investment options are designed to provide the optimal blend of impact and investment results.

This article was produced by BNY Mellon and not by the Quartz editorial staff.

  1.   Based on internal analysis of existing assets across RI, environmental finance, development finance, microfinance and impact investing as of 12/31/14.