Sustainable & Responsible Investing

Sustainable and Responsible Investments (SRIs), also notably referred to as impact investing, is a strategy where investors allocate money directly into companies and causes that have positive contributions and impact to community and society. You may be thinking: don’t most companies in our communities have a positive impact!? Perhaps.

Impact investing , also known as Sustainable and Responsible Investing, has been around for centuries. It began when churches and other religious groups needed a place to store their money and realized that by holding all contributions /donations in cash for long periods of time, they were actually losing money. So religious leaders became investors and created restrictions for how money donated to their organization could be invested.

Methodists and Quakers established investment products known as ethical unit trusts within the United States (U.S.) and United Kingdom (U.K.), which prohibited investing in:

  • Gambling
  • Tobacco
  • Alcohol

Muslims developed investment structures that align with Islamic/Shariah law which prohibits investing in:

  • Gambling
  • Pork
  • Alcohol


Impact Investing

Since the 1960’s, impact investing has gained a lot of attention, particularly as political clashes, civil social movements, and geopolitical unrest increased. This led to a growth in community activism by investors (individuals and businesses) who were also engaged community members. The evolution of impact investing has been steadily focused on raising awareness to how money within communities is distributed (allocated), and in turn, invested.

The passage of the Revenue Act of 1978 by the U.S. Congress created 401(k) employer sponsored retirement plans, forcing employees of companies to make individual investment selections with money they have put aside for retirement.

Given the adoption of 401(k) plans and Individual Retirement Accounts (IRAs) within the U.S. following the passage of the Revenue Act, this change naturally led to a greater number of investors who brought awareness to discriminatory employment practices and inhumane conditions by both public and privately held companies. These company names showed up not only on news headlines but within 401(k) accounts, as investments, service providers, and also local charitable organizations within communities.

Environmental, Social, and Governance Factors

As investors (shareholders) move beyond the broad context of sustainable and responsible investments (SRIs), Environmental, Social, and Governance (ESG) creates a framework of multiple characteristics that align investor capital (money) with targeted investment opportunities centered around risk mitigation, ethics, and sustainability.

Environmental issues concern any aspect of a company’s activity that affects the environment in a positive or negative manner. This includes:

  • greenhouse gas emissions
  • renewable energy
  • energy efficiency
  • resource depletion
  • chemical pollution

Social factors consider a company’s focus on people, their community, and influence on global society. This includes:

  • Consumer protection
  • Human rights
  • Diversity
  • Social justice
  • Inequity

Governance factors are focused on the internal operation of a company.  These areas include:

  • Employee engagement and satisfaction
  • Board and leadership diversity
  • Strong community relationships
  • Customer retention
  • Overall reputation of the organization
  • Safe employment conditions for employees and workers

Based on these characteristics and framework regarding ESG, investment products and solutions across financial services have been developed to provide easier ways for investors to distribute (allocate) money towards investments that align with perhaps one or several philosophies under the SRI umbrella.


Community/Charitable Investing

Community and charitable investing refers to contributions made by individual investors to charitable and nonprofit organizations within a community. Nonprofit and charitable organizations represent businesses who have obtained tax-exempt status. Within the United States, this is represented through the Internal Revenue Service (IRS) tax-exempt status under section 501(c)(3). Tax-exempt status refers to revenue businesses receive that may be free from income tax on a federal, state, or local level.

According to the IRS website, the following list of categories have tax-exempt status:

  • Advancement of religion
  • Advancement and creating access to education and science
  • Increasing access to literary 
  • Providing community safety
  • National or international amateur sports competition
  • Preventing animal and child cruelty
  • Eliminating prejudice and discrimination
  • Preventing community breakdown and conflict

The importance of volunteering time and giving money is fundamental to the stability of philanthropy, which makes up part of the social fabric of economies worldwide. Given the differences between businesses and organizations, there are no limits to the number of nonprofit, tax-exempt organizations that may exist and vary in mission, purpose, and overall objective within communities.

For this reason, investors must do a little homework to understand the difference between community and charitable organizations.


Donor Advised Funds (DAFs)

Donor advised funds (DAFs) provide investors with an alternative to directly donating to a specific charitable organization. DAFs are a specific type of account, designated by the Internal Revenue Service, the agency within the United States government responsible for collecting tax revenue.

DAFs (Donor Advised Funds) are sponsored and managed by financial institutions to provide individual shareholder and investor accounts, where contributions are made, tax-deductible, with the flexibility of directing grants (distributions) to charitable organizations some time in the future.

In fact, account owners (investors) of DAFs can pass along these types of accounts to their family and beneficiaries to provide generational retention of charitable assets and directed support for charitable organizations through legacy planning.

Since 2010, SRIs (Sustainable and Responsible Investments) have become increasingly popular, establishing a market for investment products such as mutual funds, exchange traded funds (ETFs), and stocks that promise to invest based on fundamental principles and objectives for social positive impact. This increase in demand has also led to an increase in partnerships between for profit and nonprofit charitable organizations.

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