In this Monthly Market Advisor:

  • For many investors, an appropriate investment is one that considers all risks, including those not easily quantified in a company’s financial statements.
  • Wells Fargo Social Impact Investing (SII) portfolios can be aligned with an investor’s personal values across multiple asset classes.
  • SII may encourage investors to think longer-term and, by extension, may help them to achieve their financial goals.

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Social Impact Investing (SII) – Reframing the Meaning of a Good Investment

The investment landscape continues to evolve. One key innovation to take root since the financial crisis is the belief by investors that a good investment is determined by more than traditional financial analysis. To that end, some investors use additional criteria to evaluate a company’s long-term risks and opportunities to determine how to better allocate their capital — a process commonly referred to as Environment, Social, and Governance (ESG) analysis. Such analysis is non-financial in nature (e.g., how a company manages its people) but has financial implications in that it may impact a company’s long-term value, including its revenues, expenses, and cost of capital. The Wells Fargo Social Impact Investing team refers to these factors as material. 

ESG analysis is specific to the industry in which a company operates. We combine insights from ESG, fundamental, and quantitative analyses to inform investment decisions. Warren Buffett popularized the term “economic moat,” a competitive advantage that one company has over other companies in the same industry. We see our ESG factors as a way of identifying potential “competitive advantages” or broad “economic moats.” 

Analyzing corporate governance is a critical component that we use when determining a good investment and applies to all companies. In our view, it’s important to consider board composition, director independence, diversity, and executive compensation to determine whether the interests and actions of the board and management are properly aligned with shareholders. Environmental and social issues are more likely to vary by sector and may include:


Source: Sustainability Accounting Standards Board and the SII Team.

Alignment: Different Motivations May Translate into Unique Portfolios

A key concept for SII investors is “alignment.” While this concept seems straightforward, alignment means different things to different people. Some investors may focus on environmental issues while others have religious values that they want reflected in their portfolio. Still others may seek alignment to address multiple investment concerns, for example, a desire to avoid high carbon emitters or companies involved in activities harmful to animals.

There are a number of themes that can help investors invest according to specific preferences, including selecting specific fund alternatives or considering a more customized approach to SII investing. Examples of the type of investment strategies that Wells Fargo Social Impact Investing offers that fall under this umbrella include:

  • Core ESG – offers broad diversification and benefits from ESG analysis but with very minimal exclusions (i.e., coal, tobacco, and controversial weapons).
  • Responsible (Traditional Socially Responsible Investing or SRI) – offers broad diversification but has a broader range of exclusions (i.e., alcohol, tobacco, gambling), consistent with the mainstream Socially Responsible Investment tradition developed in the U.S. over the past 30 years. In addition to individual investors, this approach is generally of interest to many religious organizations.
  • Equity Income – similar to the Responsible approach in philosophy but generally targets higher dividend yields.
  • Sustainable – follows the practice that environmentally minded investors began using in the early 2000s of excluding fossil fuel stocks and mining companies from their portfolios but also seeks to include those with a demonstrated commitment to sustainability.
  • Animal Welfare – designed for people and organizations primarily concerned with the humane treatment of animals. It excludes companies that test on animals, in effect limiting exposure to the Consumer Staples and Healthcare sectors.
  • Faith Based – designed to address the needs of individuals and organizations of specific faiths.

SII: A Growing Investment Trend 

About 20 percent of all assets under management in the U.S. are now invested using socially responsible or ESG criteria. The growth in interest in this investment approach (over 30 percent compounded annually since 2014) has outstripped the market with further gains expected1, supported by the Millennial generation, who are much more likely to incorporate a purpose dimension when investing. 

Foundations, nonprofits, and endowments also are increasingly interested in responsible investing as a way to extend their impact on society. These organizations have clearly defined purposes for the use of their funds, and the ability to incorporate the same values into their investment strategies is extremely attractive to them. One potential benefit of the increased interest in SII is that responsible investment policies may strengthen relationships with existing donors and employees and potentially attract new ones. 

Beyond stocks — Social Impact Investing and a Broad Diversified Portfolio

Many investors focus primarily on stocks when they contemplate adopting a SII approach. While stocks remain an important component of most investment objectives, SII principles go beyond an investor’s equity allocation, with tools to address multiple asset classes such as fixed income and real estate investment trusts (REITs). 

Like equities, fixed income investments can benefit from ESG analysis. Some investment managers believe that integrating ESG enhances their risk assessment efforts by providing additional insight into a borrower’s ability to repay2. A 2016 study from Barclays Bank PLC in the UK indicated that incorporating ESG factors in an investment-grade portfolio is typically not detrimental to returns but can be beneficial. Likewise, a 2015 study in the Journal of Portfolio Management showed a focus on building efficiency and the overall sustainability of a company’s properties can lead to better financial outcomes for real estate operators (e.g., higher rents, lower vacancy, increased tenant satisfaction, etc.)3.

Taking a Longer-Term View of Your Portfolio  

The average holding period of a stock today is only 1.6 years4 while at the same time the average American is living to almost 80 years of age. This short-term investing behavior vs. an investor’s need for a longer-term investment horizon to meet longevity needs appears to be a disconnect. This disconnect between individual investor behavior and investment time horizon can lead to poorly timed trading, increased taxes, and needless transaction costs, which, taken together over a lifetime, reduces the likelihood of achieving one’s financial goals. 

An investor who embraces SII and ESG often understands that companies must adapt to changing environments in order to produce sustainable cash flows and generate shareholder value. This may require upfront investment research and a management team willing to wait for such initiatives – like an employee diversity and inclusion program or a shift to healthier and safer products – to improve results. Taking a longer-term view of company performance may align better to an investor’s longer time horizon. Additionally, patient investors may be more likely to see through an earnings disappointment or a bad headline and focus on the company’s strategy to create long-term value. 

Some investors assume that they have to sacrifice performance in order to achieve financial goals that align with their values. The MSCI KLD 400 Social Index was launched in 1990 and is designed to help socially conscious investors weigh social and environmental factors in their investment choices. This index is considered a “benchmark index” for socially responsible strategies. It is a capitalization-weighted index of 400 U.S. securities that provides exposure to companies with outstanding ESG ratings and excludes companies whose products have negative social or environmental impacts. The chart on the next page illustrates its performance relative to the S&P 500 Index over an almost 30-year history.

SII and Traditional U.S. Equity Indexes Perform Similarly


Source: Bloomberg, as of February 28, 2018. Monthly data, assumes $100 was invested on April 30, 1990. U.S. responsible equities represented by the MSCI KLD 400 Index and U.S. large-cap equities by the S&P 500 Index. 

The S&P 500 Index is a market-capitalization-weighted index generally considered representative of the U.S. stock market. Index performance represents general market results, assumes the reinvestment of dividends and other distributions, and does not reflect deduction for fees, expenses, or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. There is no guarantee any asset class will perform in a similar manner in the future. Past performance is no guarantee of future results.


SII investing offers investors the potential to align their portfolios with their values while still having the potential to enhance returns. As mentioned above, SII principles can be applied to stocks, bonds, and REITs, which offers investors the opportunity to diversify their portfolios across these asset classes. This broad investment array allows an investor to stay committed to SII throughout their lifetime as objectives and life circumstances change. Alignment of values, performance, goals and objectives is easier than before and should continue to improve as this approach becomes even more broadly adopted by investors. For more information about how you can combine your societal goals with your investment goals, talk to your relationship manager about your SII options.

Authors: Marc Doss, CFA, CA & Nevada; William Keller, CFA Mid-Atlantic; Cam Hinds, CFA, Great Lakes; Dave Roda, CFA, Southeast; Michael Serio, CFA, Mt. Northwest; Sean McCarthy, CFA, Southwest; Kei Sasaki, CFA, Northeast

Guest contributor: Kimberly Ryan, CFA, Portfolio Manager

1 US SIF Foundation, “Report on US Sustainable, Responsible and Impact Investing Trends,” 2016.
Robert Fernandez and Nicholas Elfner. “ESG Integration in Corporate Fixed Income.” Journal of Applied Corporate Finance, Spring 2015
Avis Devine and Nils Kok, “Substainable Intangibles,” Journal of Portfolio Management (2015).
4 Strategas Partners