To better understand impact investing, responsible investing, thematic investing, and ESG integration, it is helpful to consider them as pursuing distinct objectives. These four approaches are not mutually exclusive (e.g., investing in a company with better environmental risk management strategies can align with an investor’s values as well as reduce investment risk). However, due to inconsistent use of various terms, it is important to understand these four concepts and how they relate to an investor’s goals.
Impact investing involves making an investment with the intention of generating a positive social or environmental impact in addition to a financial return, usually but not always a market-rate return. One of the oldest forms of impact investing is community investing, whereby deposits are made at community development financial institutions (regulated banks or credit unions with FDIC insurance). Those deposits are used by the institution to make loans in low income communities that support home ownership and the creation of new businesses, thus helping to revitalize the community. Microfinance lending is another form of community development, typically practiced in low-income countries. More recently, venture capital and private equity investments are being made in start-up companies whose purpose is to create some sort of societal benefit (and if done successfully, generate profits); examples include solar-charged lanterns and water purification systems that are being sold in the developing world. Impact funds pool several such investments in order to provide easier access and greater diversification to investors.
Responsible investing can be thought of as aligning one’s values or religious beliefs with one’s investments. The most common way this is pursued is through negative screening – excluding certain companies or industries from a portfolio because of the products or services those companies provide. Common investment screens prohibit investment in tobacco companies, weapons manufacturers, or heavy polluters. These decisions are not made to drive investment performance, but rather to ensure one is not supporting (through investment) or benefiting (through dividends, etc.) from activities they consider unethical or immoral.
Thematic investing entails focusing investments on particular megatrends, such as climate change or population growth, or on specific issues such as gender diversity or natural resource scarcity. Portfolios may be well-diversified, for example investing in companies across all industries that are doing a better job managing climate change risk than their peers, or companies that have better female representation within senior leadership and on their boards of directors. Thematic portfolios may also be more narrowly focused, such as seeking out companies that offer solutions to particular problems like water scarcity, unsustainable agricultural practices, or health challenges. Investors, including religious investors, may pursue thematic investing in order to invest in companies that place emphasis on important issues such as human rights, community involvement, or payment of a fair living wage.
Contrary to responsible investing, the incorporation of environmental, social, and governance (ESG) analyses into the investment decision-making process is done in order to make better, more well-informed decisions with the aim of improving risk-adjusted returns. ESG integration begins by identifying which ESG issues are material for each company, that is, which non-financial factors are likely to have a financial impact on the company, either positively through improving competitive advantage, or negatively through poor risk management. The next step is to assess the company’s performance on those ESG issues, both over time and relative to peers. Such an analysis can provide additional insights about a company’s efforts to improve productivity, increase efficiency, reduce costs, and grow profits, all of which are likely to benefit investors.
Great Lakes Advisors is proud to have been the first quantitative investment team to sign the Principals for Responsible Investing, and we continue to be a pioneer and innovator in the ESG investment community. We’ve been providing investment advisory services for more than 35 years, Socially Responsible Investing strategies since 1989, and full ESG integration since 2008. We work closely with our clients to develop portfolios that align with their values and beliefs through customized screening, positive values-based portfolio tilts, and environmental, social, and governance (ESG) integration.
The information contained herein has been obtained from sources believed to be reliable. This information should not be relied upon by the reader as research or investment advice. To determine if this strategy is appropriate for you, carefully consider the investment objectives, risk factors, and expenses before investing.
Great Lakes Advisors, LLC claims compliance with the Global Investment Performance Standards (GIPS®). A complete list of firm composites and performance results, and the policies for valuing portfolios, calculating performance, and preparing GIPS compliant presentations are available upon request. Great Lakes Advisors, LLC’s fees are available upon request and may be found in our Form ADV Part 2A.
Great Lakes Advisors, LLC (“Great Lakes” or “GLA”) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. Established in 1981, Great Lakes is a subsidiary of Wintrust Financial Corporation and a part of the Wintrust Wealth Management family of companies. On October 1, 2013, majority owned subsidiary Advanced Investment Partners, LLC (“AIP”) became fully-owned and integrated into Great Lakes. Great Lakes is a distinct business unit with distinct investment processes and procedures relating to the management and/or trading of investment portfolios for its clients. 19-5-0003