Creating long term value in your portfolio with Impact Investing

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When you invest, you do so with purpose. You likely invest to fund your retirement, to provide for your family and even leave a meaningful legacy after you're gone. Critical to your investment strategy is the ability to access market returns to grow your wealth over the long-term to help you realize more of your goals.
If you also want to invest with a positive societal or environmental purpose, you can look to adding impact investments to your portfolio. Merrill Lynch defines impact investments as investments made into companies, organizations and funds with the intention to generate measurable social and environmental impact alongside a financial return. In other words, investments designed to create positive change in society.
Many investors think creating this kind of impact with their portfolio would require some tradeoffs, such as giving up long-term growth for positive societal benefit. However, a deeper analysis of impact investments shows that this may not always be the case. In fact, when compared to traditional investments, impact investments can often offer attractive performance and appropriate levels of risk for many investors. Footnote 1

Anna Snider photo

Whatever the purpose you are investing for, impact investments can help you capture the long-term growth you need while also creating impact in society.

— Anna Snider, Head of Due Diligence, Chief Investment Office

Impact investing's focus on the long-term

Since the financial crisis, the focus on seeking immediate returns has begun to shift to a mindset that gives more importance to the potential long-term return of any given investment. This trend has been led by large, institutional investors who are now evaluating their investment decisions for their potential over many years, not just for the next quarter.
Enhanced access to company data, new investment modeling techniques and the ability to process large amounts of data means that investors can incorporate factors that go beyond traditional risk and return metrics. Now investors can evaluate their investments across a range of environmental, social and governance (ESG) factors to ascertain the impact their investments may have, not just the risk and return they may offer.
Demand for ESG data from investors also places pressure on firms to incorporate these factors into their decision making. Many firms are now evaluating their business practices for their profit potential, but also against metrics like water and energy utilization as well as larger issues such as how their manufacturing and employment practices affect society at large.
When corporate decisions are evaluated closely, the data show that decisions that focus on maximizing profits for the next quarter can actually lead to lower long-term performance of the firm. Conversely, firms that incorporate ESG factors into their strategic decision making are more likely to deliver higher returns over the long-term. By focusing on creating lasting value these ESG-focused firms may even be able to help mitigate the impact of risks beyond their control — like droughts, high energy costs or labor unrest. Footnote 2 This is why incorporating impact investments into your portfolio can actually help you capture market-rates of return and achieve potentially better long-term performance.

The range of impact investments

Impact investing comprises a range of investment types and all impact investments are not the same. Merrill Lynch classifies Impact Investments into four categories, each with their own unique risk-return profile:

Socially Responsible Investments screen out entities based on faith-based or other personal preferences, such as excluding fire-arms manufacturers. This approach can help maintain exposure to market-like returns but may increase risk due to lower diversification by screening out firms or industries.

Sustainable Investments proactively choose entities that excel at a range of environmental, social or governance factors, such as promoting and achieving sustainability or leading in factory worker safety. These firms can also provide you market-like returns and the potential for long-term performance.

Thematic Investments invest in a single environmental or social theme, such as green initiatives, gender equality and diversity or healthcare and the global trend toward obesity. These firms will likely deliver market-like returns but may exhibit higher volatility due to their narrow focus.

Impact First Investments are dedicated to addressing specific social or environmental concerns using market-based solutions. As a result, they may not necessarily be designed to provide you with market-rates of return. While Impact First investments look for market solutions to the world's problems, they may prioritize impact over the economic return of the investment. They do give you flexibility by providing you more choice in how to incorporate impact into your portfolio.

Balancing your investment and impact goals

Institutional investors and managers who work in the impact investing field seek to balance the risk, return and impact of their investments. This same process is one that you can use as you think about potentially adding impact investments to your own portfolio.
If you would like to incorporate impact into your investment strategy, while maintaining the growth potential that you need, you should focus on selecting investments that credibly combine both the intention and investment approach that you are looking for. A close examination can help you understand exactly how an investment creates impact and how it is measured and reported.
Key factors that investors need to balance when investing for impact
Venn diagram showing overlap between Impact, Risk and Return
Evaluating and selecting impact investments for your portfolio doesn't have to be a struggle. With the right support and access to guidance from impact investment experts, you can easily start to incorporate impact into your portfolio.

Jackie VanderBrug photo

Merrill Lynch research shows significant interest in impact investing, yet hesitation around actual adoption. Helping investors understand the spectrum of opportunities and unpack the misconceptions around risk allows us to help our clients to meet their impact goals.

— Jackie VanderBrug, Managing Director, Office of the CIO

Merrill Edge offers you access to a range of impact investment solutions, from individual investments to complete impact portfolios. To learn more about Impact Investing and Bank of America's commitments to ESG, visit our Impact Investing page.
Next steps
  • See how socially responsible investing might work in your portfolio (login required) with access to detailed reports that outline a company's environmental, social and governance (ESG) practices
  • To research an individual stock and ratings for that company's ESG-related business practices:
    1. Log in to your account
    2. Enter the symbol in the quote box at the top of the page
    3. Click on the red button at the bottom of the quote results to "Read the stock story" for that security (not available for all securities)
    4. Click on Chapter 4 "What do the analysts say?"
  • To find mutual funds that are managed based on the social responsibility of the underlying investments:
    1. In the mutual fund screener (log in required), open the "Pre-Defined Screens" list on the left
    2. Select the "Socially Responsible Funds" pre-defined screen
    3. Select "View"
    4. When the list is displayed, sort funds by criteria (e.g., ratings, performance, expenses or risk)
  • Not yet a client? Learn more about our innovative and personalized self-directed online investing experience. If you prefer to invest with advice and guidance, talk to a Merrill Edge Financial Solutions Advisor on how to get started.

Footnote 1 Deconstructing Risks in Impact Portfolios." Bank of America GWIM CIO. March 2018.

Footnote 2 ibid

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

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