The words “philanthropy” and “sustainable investing” often are uttered in the same sentence. Yet they are different disciplines. They do have several touch points, such as an appeal to a similar group of individuals and institutions, the growing interest in sustainable investing by charitable foundations and the emergence of impact investing.
Two Distinct Disciplines …
Sustainable investing is a rapidly growing segment of the investment industry that is often associated with philanthropy. Yet the two are very distinct disciplines. The main demarcation line between them is the profit motive.
Some sustainable investing activities seek to achieve a positive social and/or environmental impact, just as philanthropy does. However, while the financial profit motive is absent from philanthropy, it is always a feature of sustainable investing, at least to some degree.
What does sustainable investing entail? Traditional approaches have been based on identifying companies that do not fulfill an investor’s values and excluding them from portfolios. However, over the last decade, the field has evolved significantly.
Investment approaches that seek to systematically incorporate environmental, social and governance criteria in investment decisions, along with financial considerations, have become much more widespread. This evolution has set in as investors have begun to view sustainable investing as more than a way to align portfolios with their personal values or to achieve a positive social impact with their investment.
Increasingly, the desire to improve portfolio performance by capturing growth opportunities based on sustainable business practices or to insulate portfolios from the downside arising from inadequately managed sustainability risks has become more prevalent.
… With Some Overlap
Although philanthropy and sustainable investing are different disciplines, each with a distinct focus, they do have noteworthy touch points.
First, among charitable foundations, there is a noticeable trend toward aligning investment portfolios with the organization’s mission. In other words, charities are increasingly struggling to justify how they can promote various social causes through their day-to-day activities, while at the same time owning financial portfolios that include some companies whose contributions to society are at odds with the foundation’s purpose. This realization has led a rising number of charities to embrace sustainable investing approaches.
A second touch point exists within the emerging area of impact investing. This rapidly growing segment epitomizes investors’ desire to achieve a measurable positive social and/or environmental impact through their investments, in addition to a financial return. This is usually accomplished either through private equity deals, lending structures such as microfinance or the emerging segment of environmentally friendly green bonds.
Since the purpose of philanthropy, namely to promote the social good as defined by the donor, coincides with one of the objectives of impact investing, one finds that both disciplines often appeal to the same groups of individuals or institutions.
In the case of charitable foundations, impact investing is easily seen as an innovative approach that is particularly well-suited to reconciling the foundation’s portfolio with its philanthropic mission. When charities go down this route, they achieve more than simply removing the inconsistencies between their purpose and their portfolio. They are, in effect, investing for the greater good.
Stephen Freedman is the head of Cross Asset Strategy, and Frank Cannon is the first vice president of Wealth Management, both at UBS Financial Services in Baltimore. They can be reached at Stephen.Freedman@ubs.com and James.Cannon@ubs.com, respectively.