'Do Good' Investing: A Gimmick or a New Asset Class?

“Do Good” investing is a broad field with many names, from impact investing, socially responsible investing and ESG investing (environmental, social and governance). While each of these features slightly varied approaches, they all incorporate the common goal of enacting positive change in an area in which the underlying investor is passionate. And with a reported three-quarters of Americans having moderate to high interest in sustainable investing, this field should be subject to critical evaluation commensurate with other asset classes. A rigorous objective analysis will indicate whether collectively this form of investing represents a legitimate new asset class, or just a gimmick to raise assets.

It’s logical this new investment category would begin to gain prominence in the present era. As the millennial cohort grows into financial maturity, the generation known for desiring meaning in their everyday work understandably wants the same in their portfolios. Part of an overall shift towards sustainability and consciousness of our effect on the world, the morality of supporting industries through deliberate investment appears to many as a great opportunity to unite their morals and their money.

Despite widespread agreement on the underlying motivations of Do Good investing, there is no shortage of criticisms about its current state and future prospects. These valid concerns often center around the all-too-common deficiency in reliable data to evaluate important initiatives and components of the investment process. This past November, Erika Fry of Fortune put together a worrying collection of quotes from a conference of women investors at the forefront of the burgeoning sustainability movement. Their voices tell a troubling story: that there is much uncertainty that must be overcome before Do Good investing can become a mainstream investment category.

Evaluating “Do Good” Investing

In traditional investment management, the acumen of a manager is determined by how they do on a risk/reward basis. These success metrics -- which are easily calculated and accepted widely -- enable those managers who perform well to attract additional assets, and vice versa when one does not meet performance expectations. Similarly, these performance metrics factor into how much a manager charges. Ultimately it is about how much, after fees, that an investor keeps.

Within the category of Do Good investing, there is an entirely new, often subjective component, to factor into the evaluation process. How is the “Do Good” piece evaluated, and how is it measured against expectations and against peers? How should the cost/benefit analysis of the Do Good piece be incorporated into fees?

These are the kinds of thorny questions that must be addressed in a widely accepted transparent framework for this field to truly develop into a new and significant asset class. Simply trusting that the Do Good elements are efficiently and effectively employed can only go so far, especially as investors get more sophisticated and demanding.

For instance, ESG investing requires, by its very definition, a robust and sensible approach. No investment that purports to improve the world can be made without a full appreciation of historical context, the current environment, and potential effects. Failing to take such considerations into account would be a fundamental failure, and doing so is not simple or easy.

Also absent is a universally understandable benchmark -- are investors better off using a barbell approach, where they focus on generating the best returns possible and then enter into an independent unrelated transaction that allocates a percentage of those excess returns directly to organizations focused on the charitable aspect? How do you evaluate quantitatively one's impact on improving areas like the climate? How do you value one's approach in an area like education to that of someone else? These are difficult, maybe even unanswerable questions that may limit widespread adoption of socially responsible investing.

Seeking to prove their worth

Despite this issue of intangibility, ESG funds are more prevalent now than ever. In just the first quarter of 2019, 73 funds adopted ESG criteria -- a significant leap compared to the total of 51 funds in 2018. In addition, 23 of the newest ESG funds contain more than $1 billion in assets. Global investment manager Nuveen revealed that 52 percent of investors would be likely to put all their investment holdings into responsible investing, and an overwhelming 92 percent of millennials felt the same way.

In early 2018, S&P Global Ratings formed a sustainable finance team in order to analyze ESG criteria of companies and countries, hoping to determine the value of such investments and address the stigma surrounding their performance. Swiss bank UBS also sought the answer to this question examining ESG investing back to the 1970s. They found that 90 percent of the time there was no negative performance by ESG investing versus the traditional approach, and that they were incredibly stable in their gains in the long-term relative to applicable equity benchmarks.

But that’s just it -- in a world where funds and companies are constantly pressured to meet benchmarks, often as soon as every quarter, the long-term orientation of ESG investing runs counter to this mindset. How the investment strategy is actually implemented can vary significantly. In some cases it can be picking public companies that do or don’t do certain things. On the other side of the spectrum are private investments that focus on entities that have the dual objectives of profit and doing good but the profit is unquestionably compromised to perform the particular good. This variance shows that Do Good investment is fundamentally different from regular investing, and should be treated as such.

Perhaps it is time for a shift in how Do Good investing is evaluated, away from traditional standards and focused more on aspirational goals, metrics that specifically address how effective these funds and investments are in their actual ability to do good in the world.

All said, it’s quite possible the field of Do Good investing can be large without the need for formal “institutional metrics,” because there are plenty of investors with a lot of capital who believe that the intrinsic “feel good” nature of this investment type is more important than specific metrics. This is already proving to be a massive market: $502 billion has been put towards impact investing since 2007, and within the overarching trend of socially responsible investing, assets have risen to a staggering $30.7 trillion. Even as the field continues to grow, analysts and financial experts are still studying these investments to discover the intersection between profit and impact.

Do Good investing is definitely not a gimmick, but the field is not yet robust enough to be considered a bona fide asset class either. That said, as long as investors gravitate toward ESG and socially responsible investments, sponsors will offer a broad array of choices to capture a plethora of general and specific “do good” purposes.

Image credit: Nattanan Kanchanaprat/Pixabay