What started as a minor theme just decades ago looks to be turning the corner with the force of more than 75 million investors in the United States alone.
Investors have long supported the idea of a greater good through philanthropic projects. But it wasn't until late in the 20th century that they started accepting dual-missions of profitability and social responsibility at companies in which they invested. The idea has fought a tough argument against the traditional singular mandate of increasing wealth.
Now it seems the theme is becoming a major force, and new evidence points to surprising upside for investors. As the market shifts to rewarding socially-responsible companies, investors need to know what to look for and how to take advantage of the new paradigm.
A Generation Of Impact Investors
Impact investing is led by not only financial criteria but also influenced by environmental, social and governance standards (ESG). Adopting an ESG framework means management is explicitly embracing social issues and responsibilities beyond shareholder profits.
University endowments, pension funds, and a growing number of institutional investors have embraced ESG standards for investing. According to a 2016 survey by Greenwich Associates, a third of institutional investors plan to increase portfolio allocations to impact investing over the next three years.
That could be about to change as America's largest current generation -- millennials -- reaches its prime earning years.
A 2014 survey by U.S. Trust of 680 high-net-worth investors found half consider social, political or environmental impact important when making investment decisions. This number jumps to 63% among female investors and 75% among millennials.
As wealth transfers and millennials amass the largest percentage of assets over the next decade, we could see a tidal shift to investment in companies with ESG standards.
The Surprising Upside In Impact Investing
Hesitancy by individual investors to impact investing comes from the belief that management cannot maximize profits if it's also serving social and environmental stakeholders.
As it turns out, the fact that management has adopted higher standards of corporate responsibility may be a great clue for investors looking to avoid companies at risk of a crisis.
A study by Bank of America found that investing in companies with above-average ESG scores helped investors avoid 90% of the corporate bankruptcies in the eight years following 2008. The study also found that companies ranking in the top third by ESG scores outperformed stocks of companies in the bottom third of rankings by 18% over the previous decade.
The fact is that ESG companies tend to be leaders in their industries, with management that are forward-thinking. Firms with high standards for environmental and social impact are likely to have high governance standards that minimize headline risks that can send share prices tumbling.
Three Socially-Focused Firms In Every Investor's ESG Portfolio
Finding companies with high ESG-standards starts with a search for companies topping the 'Best to Work For' lists and those with explicit standards for workforce diversity. Investors should also look for companies with environmental standards and a social component within their mission statement.
Whole Foods Market (Nasdaq: WFM) has made the Fortune 100 Best Companies to Work For list in each of the last 20 years. The health-conscious grocery chain embraces fair workplace standards and profit sharing. Through its values, the company has become an icon of the ESG movement, allowing it to maintain premium prices in an otherwise commoditized grocery market.
Weak performance in the shares since 2013 has recently attracted activist investor Jana Partners, which has built a 9% ownership stake to push for operational improvements. This could kickstart profits and may even lead to a sale of underperforming assets. The company regularly boosts per-share earnings through a repurchase plan and returned $1.2 billion, nearly 10% of the market cap, to investors last year through repurchases and dividends.
Intel Corporation (Nasdaq: INTC) has eliminated the gender wage gap within the company through a commitment to equal opportunities for women and minorities. That commitment has helped the company develop a world-leading brand and is helping it grow in emerging markets. Intel controls nearly 80% of the global microprocessor market and the boom in data center growth is supporting sales of the company's server processor business.
Intel's acquisition of Altera, completed in December 2015, was its largest yet and weighed on 2016 cash flows. However, it also set the stage for a jump in sales over the next few years. Even on the increase in capital spending, the company returned $7.5 billion to shareholders through repurchase and dividends while generating $12.2 billion in free cash flow.
UnitedHealth Group (NYSE: UNH) has made social responsibility a core tenant of its business and appears in nearly every impact investing-focused ETF. The company is one of the largest Managed Care Organizations (MCO) in the United States and operates its own pharmacy-benefits manager (PBM) that negotiates drug prices with manufacturers. This combination of size and vertical integration will support revenue even in an uncertain environment for health insurers.
Through its IT services business line, UnitedHealth benefits from a fast-growing market which adds growth to the more stable insurance model. Cash flow from operations jumped in the most recent quarter and balance sheet cash surged to $16.1 billion, nearly 10% of the market capitalization. This could precipitate an increase to shareholder cash return beyond the $3.8 billion returned through share repurchases and dividends over the last year.
Risks To Consider: Socially responsible companies balance profits with the greater good, meaning they may pass up some high value projects if it conflicts with the company's stance.
Action To Take: Invest in companies that embrace high of environmental, social and governance standards for lower headline risk and potentially higher returns.
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