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We're living in a time of global economic upheaval,with small businesses dead or on life support and medium and larger businesses trying to decidewhat and where to additionally cut, after taking earliercost-cutting measures. Some decisions made by businesses havearoused public ire. Others, plaudits. People are increasinglyaware of companies that make decisions that take intoconsideration their employees, their communities, and theenvironment.

Even before COVID-19, a growing number of investors hadsome exposure to environmental, social, governance factorsimpacting investments in their portfolios — both individual andinstitutional investors. Now that the pandemichas increased focus on the "how" of doing business, will that leadto an increased awareness of ESG investing, impact investing, and sociallyresponsible investing?

No one can say for sure how the pandemic will affect anything inthe long term. But it's safe to say that investmentdecision-making that takes into account how a companybehaves in additional areas besides shareholder profitmaking ishere to stay. And this particular field of investing isgrowing.

Two financial advisors who are involved with various aspects ofsocially responsible and/or ESG investing are Wealthspire Advisors professionalsTim Hughes and Dmitriy Katsnelson. Their answers to the questionsbelow offer insights on how and why such investment is growing.

Tim Hughes, CFP has over 19 years ofexperience tailoring to the goals of business owners, families,real estate developers, profit sharing plans, and retirees, and ismanaging director with the firm. Dmitriy Katsnelson brings morethan 15 years of experience in financial services and isdeputy chief investment officer with the firm.

BenefitsPRO:  People seethese terms defined in various ways, sometimes usedinterchangeably: ESG, impact or sustainable investing,SRI. What is your preferred term?

Tim Hughes and Dmitriy Katsnelson: As this industry has grown,it has improved with increased resources, expanded capabilities andheightened investor awareness. With this progress, the labels andapproaches have evolved from SRI to ESG to Shared Values to ImpactInvesting.

We appreciate the subtle differences in the names. But with somany nuanced meanings we prefer to keep it simple by using 'ImpactInvesting,' which we believe is more general and represents theaccumulation of prior progress and future best thinking.

Impact investing has a goal of earning a positive return whilealso making a positive impact with one's capital that preferablymatches an investor's values. We've come a long way from simplyemploying investments that have negative screening to avoid certainindustries such as alcohol, tobacco, firearms, etc. Today it's moreabout sophisticated investors driving outcomes through an active,values-driven strategy.

Could you tell a little about your background? And howdid you get into the ESG, that is, Impact Investingspace?

Dmitriy: I've been part of Wealthspire Advisors' investment teamfor over five years. I spent the prior decade ata research and investment consulting firm whose clients ranged fromsmall regional advisors to national RIAs and banks. Throughout manyroles, I chaired the SRI investment committee and modelmanagement, which required broad knowledge of the strategies, fundsand managers in the SRI space.

Tim: I've been with the Wealthspire Advisors team forover 13 years and work as an advisor in our Reston, Virginiaoffice. One of my passions is environmental sustainability, whichled me to follow the clean energy industry and the ongoingdisruption of battery storage, as well as traditional renewableslike solar and wind.

What is the company's philosophy around this type ofinvesting?

As a company we are excited to have a thoughtful investmentoffering and are committed to continuing to improve and evolve ourapproach. We believe that many of our charitably inclined clientswant to give philanthropically to causes aligned with their valuesand invest accordingly to amplify the impact. Part of our job is tounderstand what clients value and offer them a path that alignswell with their needs.

What misconceptions are you still seeing around ESGinvesting/impact investing/SRI?

There is a perception among some in the financial advisorycommunity that impact investing underperforms more than traditionalinvesting. In our view, the argument should not be whether theinvestment outperforms, but whether one's investments align withtheir values. Returns matter, but the actual impact can't always beseen on a quarterly statement.

It's always important to frame outperformance orunderperformance in the context of what the client is trying toachieve. That said, we have seen areas of outperformance long-termand thus far in 2020. The Wall Street Journal recently highlightedthe outperformance during the recent COVID-19-related drawdown onMay 12.

What are the benefits of being in the ESGspace?

It's inspiring to learn about the problems being solved bycompanies working in tandem with activist Impact Investors.Further, to see those companies behaving as good stewards in areasthat make this world better – and being rewarded with increasingshare prices – only increases our personal conviction.

What are the challenges?

Although the ability to measure impact has greatly improved, itcan still be a challenge for clients to see the tangible benefits.It's important to remember that values are not a short-termendeavor. Some of the benefits take time to emerge.

Additionally, there's no 'one size fits all' approach, asdifferent investors have different priorities. As a result, thereis some element of allowing discretion to the investmentmanager.

What trends are you seeing in this space?

The role of activists has certainly evolved, especially asawareness has increased. Consumer awareness about sensitive issuesleads to increased 'voting' with their wallets on purchasingdecisions. We see this trend only continuing in the future.

Another trend is the way social media is playing a large rolewith different campaigns to influence (think of items 'going viral'and the importance of companies to be on point at all times). Also,with increasing transparency into corporate actions, largercompanies gaining larger influence, and a culture of increasingawareness and accountability, we see the pressure companies feel tobe better corporate citizens only increasing.

Overall, the biggest trend we are seeing is that those companiesare being rewarded for acting as great stewards and following theshared values of their stakeholders. Those that don't consistentlydemonstrate their values through action and listen to theirstakeholders may have to evolve to survive.

Who typically is interested in it? Are institutionalinvestors coming around to it, as far as you've seen?

Many surveys say millennials and women are more likely to beenthusiastic about Impact Investing, but our anecdotal observationshows much more diversity. There has been increased pressure oninstitutional investors to divest of certain industries that behavebadly or increase investments in companies that are bettercorporate citizens.

How can people become more educated aboutit? 

We believe there are huge opportunities out there to educateinvestors and help them understand Impact Investing.

The websites for Impact Investments have started to add moreinfo on their investments relative to traditional benchmarks. Thefunds themselves have resources on their websites with greatcontent. One example is a fund that chose to communicate how muchless carbon intensity their portfolio has relative to a well-knownbenchmark. Others highlight proxy voting records on all sorts oftopics. Engagement is a priority.

The information from third-party data aggregators has alsoimproved, with the likes of Thomson, Morningstar, Bloomberg,Sustainalytics and many others providing data and scoring onseveral impact themes. This transparency and the stories that goalong with their active engagement should be told on a broaderscale.

Other ideas to advance awareness could be to increase theattention of Impact Investing in college classrooms or addingImpact Investing's role in the curriculum in CFA / CFP® / CIMAdesignations.

How is the coronavirus pandemic affecting thisspace? 

As we mentioned earlier, Impact Investments have outperformedtraditional benchmarks again on the downside, which has not goneunnoticed.

In fact, investments increased by $12B in the first four monthsof 2020, roughly twice the amount in 2019 (per WSJ articlereferenced above).

Although the pandemic has been a tragedy and we cannot thank ourfrontline workers enough for their care and courage, one of thesilver linings of COVID-19 has been a temporary decrease in the useof fossil fuels, resulting in cleaner air from decreased nitrogendioxide.

However, carbon dioxide levels have only continued to grow andthere is a concern that the coronavirus could take resources fromother areas that are also in great need.

National Geographic recently published"Pollution Made the Pandemic Worse but Lockdowns Clean the Sky,"and referenced a WHO study that air pollution kills 7 millionpeople per year globally, and how the lockdown has (temporarily)cleaned our air and helped flatten the curve for COVID-19.

What are some of the biggest differentiators withinImpact Investing that have led to outperformance?

From a sector perspective, the energy sector is onedifferentiator. Although energy overall is now a smaller componentof the S&P 500, many big energy companies such as Exxon havestruggled mightily as competition from clean energy has continuedto disrupt.

Part of that outperformance has also come from a structuralunderweight to commodity operators, who have struggled over thepast 5-10 years.

Will there ever be one clear definition to encapsulateeverything?

Probably not, but likely you will see more definitiverequirements for sub-approaches. We have seen specificity withselect religious approaches, but others are still a ways-off.

Could this wave spur a backlash?

It is certainly possible. Many impact themes have been co-optedpolitically, resulting in unnecessary polarization. We have seenred/blue funds, vice funds, etc. launch to try to take advantage ofthese disconnects. Not many have survived, but the appetite forprofitability through discord does not seem to be waning at thispoint.

Will Impact Investing continue to play a bigger role inthe investment management industry going forward?

Yes!

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