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WHAT IS RESPONSIVE INVESTING?

FEG uses Responsive Investing (RI) as an umbrella holistic term to encompass many types of investments related to economic, environmental, social, governance, or impact investments. We believe RI is becoming increasingly prevalent, with a number of implementation options as investors continue to dedicate more assets. 

 

II Incorporating ESG

 

GROWING OPPORTUNITY AND AWARENESS

Investors decide to invest in RI for a number of reasons including mission / social benefit, fiduciary duty / returns, risk, and client demand.1 There have been a number of studies showing an all-time high among respondents incorporating ESG criteria into their decision making, and that it will have a greater impact in the future. 

Additionally, there are a number of issues that institutions are trying to address through RI.  Since 2012, climate change and carbon emissions have been the most important to institutions, with more than $2.2 trillion invested in solutions.2 

 

INTENTIONALITY AND TYPES OF INVESTMENTS

  • The responsive investment approach an investor adopts depends on his or her level of intentionality, ranging from exclusionary screens on one end of the spectrum to targeted impact investments on the other end.
  • The investment can range from low-risk opportunities, like local loan guarantees or microfinance, to higher returning strategies such as a for-profit venture fund.

 

To learn more about the impact investing and ways to utilize intentionality, read our FEG Insight, Investing with the Head and the Heart.

 

RESPONSIVE INVESTING TERMINOLOGY

A responsive investment (RI) is any investment made by an organization that seeks to gain both financial and social benefit. Some of the most common approaches to responsive investing are outlined below. Many organizations will use several or all of these approaches.

RI Terminology

 

SRI investments are values-driven decisions to analyze specific industries or sectors. This often includes negative exclusionary criteria (ex. Exclusion of “sin stocks”).

  • Socially responsible investing has grown significantly over the years, expanding the notion of fiduciary responsibility.
  • Many faith-based organizations are now expanding their faith-based mission to encompass the investment portfolio.

SRI Screen

Environmental, Social, Governance (ESG) is a holistic view of all aspects that can impact security value. ESG factors are a subset of non-financial performance indicators which include sustainable, ethical, and corporate governance issues.

  • Returns can be competitive with other markets.
  • Engagement efforts with corporate management can be a function of the investment process.
  • An example is a publicly traded ESG Mutual Fund.

 

ESG Issues

Leveraging shareholder rights of public investments to express the organization’s mission and values.

  • Discussion with corporate management regarding ESG related concerns can affect change in business practices.

 

Engagement

MRI includes public or private investments that support a focused mission of the organization by generating a positive social or environmental impact.

  • MRI are market rate investments that support the mission of the organization.
  • Fundamentally a financial investment and must meet the standards of a conventional investment.
  • Can take several forms but often the greatest impact in the private equity space.

Example:
A woman’s support organization makes a private equity investment focused on female owned or managed companies.

While in direct alignment with the mission, the return expectation is in line with the financial return expectations of other private equity investments.

PRI is a private mission-aligned investment that acts as a component of an organization’s grant-making.

  • PRI provides low-cost financing via loans or loan guarantees.
  • It is a part of the Tax Reform Act of 1969.
  • PRI are like grants in that the organization gives money to a charitable organization, but the expectation is that the loan will be repaid.
  • Unlike a traditional investment there is low expectation of excess return.
  • Commonly considered a supplement to existing grant program and eligible to count against 5% required distribution.

Examples
A private foundation provides start-up costs to a charitable organization beginning a capital campaign.

Offering financing to a private non-profit to conduct a feasibility study to explore the opportunity of constructing a solar facility. If the facility proves successful, the loan is repaid. If it is not, then the loan converts to a grant and counts against the 5% required distribution.

Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. In many ways an impact investment is similar to an MRI.

Impact

 

IMPLEMENTING RI 

Next, learn about implementation considerations, implementation considerations including performance, the spectrum of RI investing, levels of implementation and intentionality, discovering your organization's starting point, and measuring RI's impact.

 


 

 

FOOTNOTES

1 CFA Institute and Principles for Responsible Investment
2 US SIF Foundation's 2018 report