All Business & Investing Economics

Corporate-Philanthropic Investment Spectrum

Investing – the process of expending money with an expectation of a return – allows for returns on a spectrum from the purely financial to the purely altruistically impactful. Research finds that altruistic spending brings a host of benefits to the giver affecting not only happiness, but also health and even greater feelings of wealth.

Altruistic impact can be measured using the ‘ESG’ framework, which assess businesses on a broad array of Environmental, Social, and Governance standards and criteria of corporate sustainability. In addition to impact, adopting these criteria is linked to decreased operating risks for companies. To continue operations sustainably – be a going concern –  institutions need to be cognizant of monetary and community value they produce and consume. There is a range of investment options available for targeting both financial and impactful returns.

Not Just Altruism

Standards within the ESG can have a large impact on the sustainability of the company and therefore on your investments. Practices ranging from poor employer practices to environmental pollution are risky. Profitability may be higher for a while, but these practices increase the risk of litigation, regulation, and social media-fueled outrage.

As litigation, regulation, and social consciousness often come in waves, companies that have similar profiles for certain risks will see their asset prices rise and fall similarly. For example, companies that pay their employees the minimum wage would all take a profitability hit – and hence see a stock price drop – if the national minimum wage is increased.

Because of the movements of companies with similar risk profiles are correlated, portfolios of assets based on these profiles will have different risk profiles from non-ESG portfolios. In other words, a fund of the largest American stocks, such as the S&P 500, may have a different beta from a fund that excludes industries such as oil. If oil prices soar, the former fund price may rise while the latter fund price may fall.  For this reason, studies comparing the relative performance of traditional and ESG funds usually find only neutral effects.

Range of Options

The following representation of the spectrum of investment and philanthropy demonstrates the changing influence of competitive financial returns and altruistic impact.

On one side of the spectrum is a focus on competitive financial returns. Fund managers have flexibility about the definition of ESG criteria as long as they disclose it, but the market leader in ESG ratings space is MSCI. In addition to scores, MSCI and its competitors create benchmarks that fund managers can passively index or attempt to outperform through active management.

Notes

USA Examples

Traditional The standard investment for exposure to stocks in the USA. SPDR S&P 500 ETF (SPY)
Responsible / Ethical (SRI) As some industries are removed, the performance of this fund deviates from the traditional S&P500. iShares MSCI KLD 400 Social ETF (DSI)
Sustainable (ESG) In between the Traditional and the SRI as ESG scores impact the weight of stocks in the fund, but are not automatically screened out. iShares MSCI USA ESG Select ETF (KLD)
Thematic Performance may be very different from the traditional fund. These are available for issues ranging from climate to diversity. SPDR SSGA Gender Diversity Index ETF (SHE)

Further along the spectrum are Impact (First) Investments where Environmental and Social considerations take precedence over financial returns. These operations tend to riskier and may serve as proof of concept pilots. Kiva personal loans, for example, may be repaid but the investor typically cares more about paying forward opportunities to needy borrowers. Some companies, such as those in solar energy, have advanced from uncertain impact investment pilots to corporations as they desrisked. The main benefit of being a public company is access to much more capital for growth.

Finally, on the other end of spectrum are philanthropies. Financial returns are disregarded in favor of social and environmental solutions. Instead of equity, the investment comes in the form of grants and donations. Charities and other nonprofits are the main examples. These are primarily registered as tax exempt organizations and governments encourage giving through to tax deductions for the giver. These organizations report their financial status and impact M&E.

Crowdfunding campaigns hosted on Kickstarter and IndieGoGo are essentially philanthropic as funders get no financial returns but taxes depend on how the individual campaigns are registered with the government. However, they usually frame themselves as impact investments looking for capital to get off the ground without providing equity to their supporters. When Oculus VR, a Kickstarter backed campaign, was acquired by Facebook, its supporters did not share in the financial gains.

As everyone’s situation is their own, this information should not be regarded as investment recommendations but as a springboard for more informed decision making.

What do you think?

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