Summer 2017

By: Ross Miller, CFA®

An investor movement has gained momentum these last few

years. Once the province of religious and not-for-profit organi-

zations, socially responsible investing (SRI) has grown to encom-

pass a much broader set of principles, incorporating environ-

mental, social and governance (ESG) behaviors as well as ulti-

mate societal impact. But there is no one set of rules for inves-

tors to follow as individual preferences can be quite unique.

Additionally, investors can be confused by the myriad terms,

such as Socially Responsible, ESG or Impact Investing, which all

represent slightly different ways of aligning one’s personal val-

ues and investments. In this piece, we will define terms, de-

scribe the market and discuss whether the alignment of one’s

values with his or her investments can still provide attractive

financial returns.

WHAT IS SRI, ESG, AND IMPACT INVESTING?

SRI or Socially Responsible Investing is primarily done through

an asset screen, excluding companies that do not align with an

investor’s values. Typically, this screen narrows an enormous

universe by excluding alcohol, tobacco, energy, casino and de-

fense/weapons companies. The main purpose of SRI is to gener-

ate market-like returns while avoiding these negatively

screened companies.

ESG or Environmental, Social and Governance investing takes

SRI a step further, seeking to invest in companies that meet

strict ESG criteria and are making an effort to better society.

However, the impact may not be directly through the compa-

ny’s core business. For example, an ESG candidate might be a

technology company with a diversified board, operating in an

energy efficient building while acting as a good community part-

ner. ESG stock and bond investments should generate market-

like returns while investing in companies embracing positive

corporate and societal norms.

Impact Investing is a more focused form of ESG and SRI in-

vesting and can be implemented through stocks, bonds and

private equity. The main purpose of Impact Investing is to gen-

erate a positive societal or environmental outcome while hop-

ing to return a reasonable amount on your investment. For ex-

ample, “Green” bond issuance proceeds may be for the devel-

opment of water infrastructure in a community; another exam-

ple would be investing with a private start-up technology com-

pany that is focused on improving access to educational tools

for inner-city youth.

SRI, ESG AND IMPACT INVESTING RETURNS

A common question is, “Will Impact Investing returns be lower

than market returns?” The answer is not clear as numerous

studies contradict each other, while one investor’s definition of

return in this space may be different than another’s. Overall,

ESG, SRI or Impact Investing can generate market-like returns

over an economic cycle but can have longer periods of sus-

tained underperformance, due to the type of companies the

strategies avoid.

If a client makes an investment to impact the environment or

society, the impact (if it can be quantified) plus the cash return

will hopefully beat the market. For example, it is difficult to

quantify how much a new water system in a rural community

can improve local quality of life and crop production. An inves-

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tor may receive 5% on his or her investment but would not see

the overall societal impact in cash terms.

Unfortunately, metrics around measurability, transparency and

accountability have been difficult to construct and calculate.

Not-for-profits such as the Climate Bonds Initiative and Sus-

tainalytics are helping to improve transparency. They are help-

ing by subjecting bond issuance to actual eligibility require-

ments and getting green certification. Unfortunately, all stand-

ards are currently voluntary, meaning all “Green” bonds may

not actually be used for green purposes.

THE FUTURE

There are currently $25 trillion of “impact” assets under man-

agement with $8.7 trillion focused in the U.S.1 This makes up

nearly 22% of total assets managed in the U.S! We expect these

numbers to grow as the idea gains further traction.

Millennials are another factor contributing to the growing focus

on Impact Investing, as 67% state that environmental, social and

governance factors are important to investment decisions.2 It is

also important to note that most publicly traded companies’

annual reports now include an ESG report. Thus, it is becoming

more common for ESG factors to be incorporated not only in

investment decisions but how investors view corporations.

There are numerous ways to get involved with ESG, SRI or Im-

pact Investing and the number of investment opportunities is

growing. One’s involvement, though, will be based on individu-

al preferences, the impact one would like to make and the fi-

nancial returns needed.

ESG topics are not just a trend or niche investment space any-

more but are becoming more important to individuals and insti-

tutions globally. ESG, SRI and Impact Investing are mainstream

and it is likely that you’ve heard of one of these topics within

the last year. It’s no longer a question of, “How do I find an op-

portunity to invest this way?” but more, “How do I choose from

all the opportunities?”

HOW WE CAN HELP!

Our clients are pleased to learn that 95% of the stocks in Market

Street’s U.S. Equity Fund already meet ESG criteria. We know

the process of researching, due diligence on managers and

choosing investments is not easy. Based upon our experience,

we know the sheer number of opportunities can be overwhelm-

ing. If an investor is looking to gain some exposure in this space,

he or she might consider allocating a small portion of their

portfolio to get a better understanding of the industry. This al-

lows for an investor to begin focusing on impact while not dis-

rupting one’s overall asset allocation and maintaining similar

return expectations.

We recognize how personal these types of investments can be.

While we continue to research, talk with managers and monitor

investments in the space, we also want to hear from our clients!

We want to know what impact goals you may have and would

love the chance to discuss how we can help you achieve those

goals.

If you are interested in reading more about this topic, please visit the Global Impact Investing Network’s website at: www.thegiin.org.

About the Author ...

Ross Miller, CFA® Senior Investment Analyst

Ross joined Market Street in 2014 and assists

the Chief Investment Officer and Director of

Investments with implementation of the

investment program. Prior to joining Market

Street, Ross worked in institutional asset

management with United Kingdom-affiliated Aviva Investors North

America, which was recently acquired by Athene Asset Manage-

ment. At Aviva, he was a Reporting Analyst for two years and then

moved into Investment Performance where he served as a Perfor-

mance Analyst. Ross received his B.S. in Finance and Management

from Drake University. He holds the right to use the Chartered Fi-

nancial Analyst® designation and is also a member of the New York

Society of Securities Analysts.

Outside of work, you may find Ross on the ice, either playing or

coaching hockey. For the past two years, he has coached 14 and

under, and will be coaching an 18 and under team this year with

the Corning Youth Hockey Association.

The information contained in this commentary is based upon Market Street Trust Company’s outlook and opinions, and is for informational and educational purposes only. The accuracy and completeness of sourced data is not guaranteed. Not every investor is eligible for all of the investments discussed in this commentary, and none of the information is intended as investment advice or securities recommendations. Past performance is not indicative of future returns.

1 US SIF Foundation, “Report on US Sustainable, Responsible, and Impact Investing Trends 2016,” p. 5 2 Michael P. Regan, “The Do-Gooder Premium: BlackRock in a Hard Place on Social Impact Investing”, Bloomberg LP, December 2, 2015, https://www.bloomberg.com/gadfly/articles/2015-12-02/blackrock-in-a-hard-place-on-social-impact-investing