In 2020, there were $51.1 billion of flows into environmental, social, and governance (ESG) funds available to U.S. investors, marking a nearly tenfold increase over 2018 levels. This stat suggests that more and more investors care about aligning their investments with their values, but is ESG investing, also known as impact investing, right for you?
Before we answer that question, let’s establish what exactly impact investing is and define other commonly used terms in this space.
What is Impact Investing?
Impact investing is an investment strategy that combines financial returns with the pursuit of positive change in the world. Through the use of investment screeners, it’s possible to invest in companies and projects that solve specific problems. For example, investors can choose to invest in companies that only use renewable energy. You can find impact investments in several asset classes including equities and fixed income.
What are the Different Types of Impact Investments?
There are a few commonly used terms in the impact investing space that you should get familiar with:
- Sustainable investing is often used interchangeably with impact investing.
- As touched on earlier, ESG means environmental, social, and governance. There are firms that score investments based on each of these three factors.
- Socially responsible investing (SRI) means investing based on specific ethical guidelines, going a step further than ESG investing.
How Does ESG Investing Affect Your Portfolio Performance?
According to Morningstar, there is no risk-reward tradeoff to global ESG investing and a slight cost with U.S. and Canadian ESG investing. In other words, U.S. investors may be sacrificing a small amount of returns in exchange for making investments that fit their values.
Many ESG investors are willing to make that tradeoff, though; according to a recent survey of Investopedia and Treehugger readers, nearly half of ESG investors said they’d be willing to take a 10% loss over a five-year period to invest in a company that “aligns exceptionally against ESG standards.” But 74% of respondents said that valuation/price was “very or extremely important to them.”
The data doesn’t mean that investors need to make a tradeoff between their values and their returns, but it does indicate that the average ESG-friendly investment trades at a premium.
How to Make ESG Investments That Closely Align With Your Values
While existing ESG tools can help investors learn more about impact investing and the different opportunities available to them, it can be difficult to know the best investments to choose. Investing with a firm that is transparent about its screening processes and does its due diligence can have a significant impact.
The investment team for the VanEck Environmental Sustainability Fund, for example, not only uses several criteria to evaluate the ESG practices of companies but also conducts meetings with company management, where the team raises ESG-related issues pertinent to the company and industry. This bottom-up approach allows VanEck to more accurately determine whether a company is meeting ESG standards.
The VanEck HIP Sustainable Muni ETF is another ESG offering that offers exposure to bonds issued to fund sustainability-focused projects, screened according to data and ratings from HIP Investor.
Whether or not ESG investing is right for you depends on whether you want to combine your values with your investments. From there, you have to find a way to ensure that your ESG investments meet both your financial and environmental/social objectives. By doing that, you can build a sustainable portfolio—in every sense of the word.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to implement the investment strategy. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within the fund’s investment objective, inclusion of this statement does not imply that the strategy has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.
The VanEck HIP Sustainable Muni ETF’s strategy of investing in municipal debt securities of issuers promoting sustainable development may limit the types and number of investments available to the Fund or cause the Fund to invest in securities that underperform the market as a whole. As a result, the Fund may underperform funds that do not have a sustainable investing strategy or funds with sustainable investing strategies that do not employ HIP Ratings. In addition, the Fund relies on the Data Provider for the identification of issuers that promote sustainable development based on their HIP Ratings; however, there can be no guarantee that the Data Provider’s methodology will align with the Fund’s investment strategy or desirable issuers can be correctly identified. Moreover, SDGs 9, 11 and 12 may be modified or abandoned in the future and there can be no guarantee that the Fund will be able to continue to use HIP Ratings or find an appropriate substitute ratings system.
An investment in the Fund may be subject to risks which include, among others, risks related sustainable impact investing strategy, municipal securities, credit, interest rate, call, data, California, New York, education bond , health care bond, housing bond, transportation bond, management, operational, authorized participant concentration, absence of prior active market, trading issues, market, fund shares trading, premium/discount and liquidity of fund Shares, non-diversified, state concentration risks all of which may adversely affect the Fund. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Fund’s income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Environmental Sustainability Fund: Companies that promote positive environmental policies may not perform as well as companies that do not pursue such goals. Issuers engaged in environmentally beneficial business lines may be difficult to identify and investments in them maybe volatile. Environmentally-focused investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by the Adviser or any judgment exercised by the Adviser will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and the Adviser is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. An investment in the Fund may be subject to risks which include, among others, investing in derivatives, equity securities, emerging market securities. environmental-related securities, foreign currency transactions, foreign securities, investments in other investment companies, management, market, new fund risk, non-diversification, operational, sectors, small and medium capitalization companies, special purpose acquisition companies. Small- and medium-capitalization companies may be subject to elevated risks.
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