Here in the New York area, the war for talent is real, especially in technology, finance and fintech.
Consistently, surveys report that one of the most important things to prospective employees is corporate social responsibility and behavior. Additionally, it is becoming clear that the financial services industry is facing difficulty in engaging young people in traditional investment conversations. To that end, the topic of impact investing shows some promise and can potentially serve both important purposes.
Before I get into impact investing and the definition of it, it is probably best to cover the history of socially responsible or environmental, social and governance (ESG) investing.
Corporate social responsibility is a topic that is on the minds of some of the largest, most successful companies in the world, as well as the minds of their younger prospective employees. This is a topic that the investment community has done reasonably well with.
Socially responsible investing has been around since 1758, when the Quakers prohibited members from participating in the slave trade. More modern examples can be found in the 1960s with investments being made in issues related to civil rights and labor. Most notably, in the 1970s, companies that refused to invest or do business in South Africa because of their apartheid practices, provided the watershed moment that showed how impactful, socially responsible investing could be in that it effectively helped end the practice.
The 1990s saw a bit of a boom in funds that refused to invest in gun manufacturers, tobacco stocks or other companies harmful to humanity or the environment.
More recently though, we have seen the advent of a subset of socially responsible investing called impact investing. These types of investments are also known to focus on the triple bottom line (TBL) – profit, people, planet. Impact investing seeks to invest in the typically “uninvestable,” such as diversity, clean air, clean water and healthcare for underserved. The definition of impact investing should be something like, investing in a company that not only generates financial returns but also creates positive social or environmental impact. This differs from socially responsible investing in that a socially responsible company has a goal of leaving the planet or humanity no worse off.
Since we are in the early stages of impact investing, the usual difficulties of measuring impact, classifying investments, and finding acceptable comparative metrics are tricky. For this reason, most investments have been private placement, private equity or other types of investments not readily available to the masses or investing public. There is one 1940 Act mutual fund that recently became available for a $1,000 minimum investment, called the Cornerstone Capital Access Impact Fund (CCIIX). This fund is likely paving the way for more mainstream investing in impact investments.
For purposes of this discussion, we’ll focus on the role of socially responsible investments in 401(k) plans and in the potential employee engagement conversation.
From my experience what typically happens is a retirement plan or investment committee will report to me as the consultant, that some employees have been asking about responsible investments for the 401(k) or 403(b) plan. They then ask if we, the consultants can find examples that fit this classification, and are also able to pass the fiduciary screens. We then turn the conversation into an investment one, and muddy the waters with terms like alpha and beta and standard deviation. Then we throw in active, passive, growth, value, large cap, small cap, baseball cap. Finally, we show the committee two or three funds that are top-quartile performers, and they pick one. Then, human resources communicates to the 10 people who have asked about socially responsible investing, that they now have an option. Those 10 people invest in the fund and that’s the end of the conversation.
Let’s tilt this on its head a bit. In my experience with human resource professionals and real issues of low employee savings rates, engagement of younger people in the investment conversation and the clear focus of young people on issues of diversity and corporate social responsibility, I like to present this scenario differently.
When a company is trying to attract talent, and part of the employer brand is to demonstrate all the ways the company is acting responsibly to new potential hires, what if they were able to state the following? “this is how seriously we take our responsibility. Here are three, investment options in your 401(k) that invest in companies that make the world more diverse, fair and equitable – companies that provide clean water to places that don’t have it, or healthcare to people who desperately need it.” Do you think the conversation is going to be about, “Well, how do they perform against their peers? What is the Sharpe ratio?” I, and most HR professionals I speak to, think it will go more like, “How much can I put in?” or “How much can I invest?”
It becomes a matter of taking a good, but stale and boring investment conversation and turning into a more relevant, meaningful human conversation. Same, same, but with better, more engaging results, appealing to the issues that matter to the people that matter at our organizations.