Purpose-Driven Portfolios: Navigating Socially Responsible and Impact Investing
By Daniel Baumgartner & Petra Peters
As the global financial market grows ever more complex, a new opportunity of anchoring your investments in purpose and principles has emerged. The singular pursuit of financial returns no longer defines many investors’ approach; instead they aim to blend their capital toward investments that can yield both positive returns and a positive societal impact. This shift isn’t just a passing trend but signifies a broader awareness of pressing global challenges, from climate change and social inequalities to issues of corporate integrity.
More and more investors are looking beyond traditional metrics and venturing into the realm of purpose-driven portfolios. This article delves into the intricacies of socially responsible and impact investing, illuminating the differences and overlaps between Environmental, Social, and Governance (ESG) investing and Socially Responsible Investing (SRI). How do these strategies influence overall performance? And more crucially, do they genuinely make a positive difference in the world? By the end, we hope you’re better equipped to align your investments with your values, creating a balanced portfolio that serves both your financial goals and the global good.
ESG vs. SRI Investments
As the investment world becomes more attuned to the desire of socially conscious investors, two primary strategies have risen to the forefront: Environmental, Social, and Governance (ESG) investing and Socially Responsible Investing (SRI).
While both aim to align investments with ethical and sustainable principles, they approach this objective differently. ESG investing uses a broad spectrum of criteria to measure companies on their environmental, social, and governance practices. It operates on the belief that these factors, when integrated with traditional financial analysis, can enhance long-term portfolio value and mitigate potential risks.
Conversely, SRI, which has its roots in excluding investments that didn’t align with certain moral values, primarily focuses on avoiding investments in companies that engage in perceived negative societal impacts, such as those in the tobacco, alcohol, or fossil fuel industries.
While ESG casts a wide net, examining both the positive and negative impacts of a company, SRI takes a more straightforward exclusionary approach, filtering out industries and businesses not in sync with an investor’s ethical compass. Neither approach is right or wrong, but, rather, present options to investors who have an array of values they’d like to incorporate into investment decisions.
How it Affects Performance
One of the most debated aspects of purpose-driven investing is its influence on financial performance. Historically, many assumed that integrating ethical, social, or environmental considerations into an investment strategy would inevitably lead to reduced returns; however, recent trends and research indicate otherwise. ESG-focused investment products have demonstrated returns on par with, or even exceeding, those of traditional investment strategies.
Additionally, other studies found that sustainable funds outperformed during times of market uncertainty, like the onset of COVID-19 in March of 2020. That suggests these sustainable investments could help the overall risk profile of your portfolio.
These studies counter the long-held belief that considering ESG factors might detract from performance. In fact, by addressing financially material issues such as climate risks, investments in human capital, and good governance, companies can potentially bolster their long-term sustainability and resilience. On the other hand, while SRI strategies primarily emphasize ethical considerations, even these portfolios, when well-constructed, can produce competitive market returns.
The key takeaway is that purpose-driven investing, whether through ESG or SRI, doesn’t inherently compromise financial outcomes. In many instances, it has proven to amplify them, by identifying companies better prepared for future challenges and opportunities.
Does it Make a Difference?
When investors channel funds toward companies and projects aligned with positive environmental, social, and governance practices, they’re driving real-world change. Companies are becoming increasingly aware of the emphasis their shareholders place on ESG and SRI practices, and this awareness often catalyzes shifts in operational strategies, ensuring businesses are more sustainable and ethical in their operations. To illustrate this awareness, in 2011 only 20% of companies in the S&P 500 reported on their sustainability practices. In 2018, 86% of companies reported these metrics.
Moreover, as sustainable investing gains traction, it puts pressure on other market participants to evaluate and possibly improve their practices. While quantifying the exact societal impact of such investments can be challenging, there’s no denying the ripple effect they create, influencing industries and communities to progress toward a more sustainable and equitable future.
Crafting a Future Through Conscious Investing
In an era where every financial decision holds the power to shape the practices and standards of worldwide companies, choosing the right investment strategy becomes more than just a financial move; it’s a statement of values.
At Terra Nova Asset Management, we’re poised to guide you through this journey of purpose-driven investing, aligning both your financial aspirations and societal impact seamlessly. Whether you’re keen on exploring ESG avenues or diving deep into SRI realms, our team is equipped to help. Reach out and let’s craft a legacy that reflects not just monetary growth, but a brighter, more sustainable future.
If you feel like we might be a good fit, you can reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting, and we’ll get in touch with you soon!
About Daniel
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
About Petra
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.