Sustainability Matters: A Take-Action Moment

When it comes to systemic racism, I wrote earlier this week, change has to come from many directions. If you are fortunate enough to be an investor, do not ignore the broader social impact your investments can make. In the past you may have been told to check your social conscience at the door when it comes to investing. Just maximize returns, don't worry about what may be underneath your portfolio's hood, and enjoy the proceeds. Then, if you wish, you can reactivate your social conscience and contribute charitably to the social causes you deem worthy.

That argument was bolstered by dire warnings that your investments might "underperform" if you tried to invest with a consideration of conscience. Those warnings turned out not to be true, but they were enough to dissuade investors during a time when not all that many were interested. Today, it's harder for financial advisors to give the wave-off to the growing number of investors who want to invest for sustainability and impact.

For one thing, using environmental, social, and governance insights helps portfolio managers make better decisions, which clearly can help returns. For another, ESG information helps investors understand how well companies treat their stakeholders and the environment. These ESG assessments, in turn, form the basis of engagements between shareholders and companies that can result in changes in corporate policy and behavior. Proxy voting and shareholder resolutions provide additional paths for shareholder influence.

My colleague Jackie Cook reports that a record number of social and environmental shareholder resolutions have attracted majority shareholder support this year with still a month of public company annual meetings to go.

There is a grand total of one fund available to U.S. investors that specifically focuses on companies with strong racial and ethnic diversity policies: Impact Shares NAACP Minority Empowerment ETF NACP. Launched last year, the passively managed large-cap U.S. fund tracks an index created by our index team at Morningstar, based on data from Sustainalytics, called the Morningstar Minority Empowerment Index. Any profits earned by Impact Shares are donated to the NAACP.

But a growing number of broadly diversified sustainable investment equity funds--nearly 200--are built more broadly around ESG assessments that typically include the consideration of corporate diversity programs, discrimination policies, board diversity, freedom of association policies, and other relevant areas like supplier standards and worker health and safety. Many of these funds have performed well over the past five years, including so far during this year's recession.

Most of them have active engagement and proxy voting programs, and going forward, you can expect these funds to engage with companies about how they are addressing systemic racism. Calvert Research and Management, for example, says it will ask companies to provide information on the racial diversity of their employees, disclose pay equity across race and gender, and publicly take a stand on what they are doing to combat racism in the criminal justice and education systems.

If you want your asset managers to be engaging with companies about their response to the pandemic and about how they are addressing racial injustice, invest in a sustainable equity fund.

What about the rest of your portfolio? Investing in bonds can have even more impact. Not only can bond fund portfolio managers make more robust risk evaluations of corporate bonds using ESG assessments, they can focus on bonds' use of proceeds to evaluate their social or environmental impact. In fact, some bond funds are making impact their central thematic focus by focusing on green bonds that address climate-related problems, or on social bonds that support affordable housing and economic development in underserved communities.

TIAA-CREF Core Impact Bond TSBIX, for example, evaluates corporate issuers on ESG while also devoting 30% to 40% of assets to bonds that have a direct and measurable social impact. Two long-established funds, RBC's Access Capital Community Investment ACCSX and Community Capital's CRA Qualified Investment CRAIX focus on affordable housing, small business, and minority advancement in low-to-moderate income communities. All these funds achieve social impact while also providing exposure to high-quality, intermediate-term bonds that investors would get in a conventional bond fund.

These are taxable funds, but if you invest in tax-free municipal bonds, there are now 10 muni-bond funds in the U.S. that focus in areas like affordable housing, education, economic and community development, and healthcare in marginalized and underserved communities. Examples include AB Impact Municipal Income ABIMX and Columbia US Social Bond CONAX.

And then there is cash. Consider banking at one of the many community development financial institutions. These include banks, thrifts, and credit unions throughout the country that devote at least 60% of their business to benefit low-income communities that are underserved by traditional banks. To find a CDFI near you, here is a list of these institutions certified by the U.S. Treasury Department. Many CDFIs offer certificates of deposit in addition to checking and money market accounts.

Or take a look at the innovative online bank, Aspiration, which helps its customers bank, spend, and give in an environmentally and socially conscious way. Its sweep program is with a group of community banks, thereby increasing their deposits and the money they can lend to underserved communities. The bank gives away 10% of its earnings to non-profits such as Color of Change. Aspiration also encourages its customers to spend their money at businesses with impact. This month, it's offering extra cash back for purchases customers make at those scoring highest on diversity and equality factors.

If you are wealthy enough to be an accredited investor, you have ample opportunity to make additional impact investments, be they market rate or below market rate. But any investor, large or small, can purchase a Community Investment Note from Calvert Impact Capital, a nonprofit (not affiliated with Calvert Research and Management) that has invested in communities left out of traditional capital markets for 25 years.

We are in a take-action moment in America right now. In taking action, don't overlook your financial resources. Through the use of sustainable equity funds, impact bond funds, and community banking, you can activate your entire investment portfolio and your bank account. Doing so gives you the ability to use your money in impactful ways as you save it and grow it, and then again when you donate it.

Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.