Impact investing is taking off around the world, but how do you actually build an investment portfolio for good? Social finance pro & CoPower Green Bond investor Jory Cohen opens up the portfolio he manages with his wife Jill to show us their approach.
When I first discovered impact investing in university, I thought to myself: “this is what I want to do for the rest of my life.” For me, intentionally leveraging capital for good represented the best way to make my impact on the world and so I focused on building a career in social finance.
Today, I manage an investment portfolio worth nearly $40 million for the Inspirit Foundation. My mandate as Director of Social Finance & Investment: to build a 100% impact investment portfolio aligned with the Foundation’s vision of a more just, sustainable and inclusive world.
Last spring, my wife Jill and I set out on a journey to do the same, to align 100% of our personal investments with our values.
The first step was opening up our portfolio and taking a good, hard look at what our money was doing. It wasn’t a pretty picture. Back then, over 95% of our assets were in investments that don’t align with, or even worse, work against our values. There’s still lots to do, but a year later we’ve made progress with 41% of our portfolio now working for positive impact.
"The first step was opening up our portfolio and taking a good, hard look at what our money was doing. It wasn’t a pretty picture."
We’ve defined impact investments as investments in companies with excellent social, environmental and governance (ESG) track records, and that earn at least 50% of their revenue from activities that support the UN Sustainable Development Goals (UNSDGs). The rest, investments in companies that seek returns regardless of those factors, we categorize as traditional.
Building a diversified portfolio
Just as you might expect to see in a traditionally managed portfolio, we’re mitigating risk by diversifying across asset classes. Our target asset mix is based on our personal circumstances and goals, eg. we both have full time jobs; we have a long time horizon and therefore can take on more risk than shorter-term investors might be comfortable with.
One prevalent myth about impact investing is that there aren't enough options to build a diversified portfolio. It’s true that avoiding large sectors of the economy like fossil fuels shrinks the available pool, but we’re finding sufficient options for a sound diversification strategy, and it’s only going to get better from here.
Our Private Fixed Income Investments
If you’re familiar with asset allocations, you might be surprised by our 15% target for private fixed income and 0% target for public fixed income. This may change, but our rationale is that the 5% annual returns we expect to see from these private investments significantly outperform the lower returns found in the public fixed income market today. It’s important to note that the higher returns offered by private investments are often tied to higher risk than you’d find, say, with a bank-issued GIC or government bond.
Investing in private fixed income allows us to generate the positive impact we desire, and in each of these cases, it’s easy to understand how our money is being used.
For example, our CoPower Green Bonds help finance clean energy and energy efficiency infrastructure across Canada. Similarly, our Solar Share Bonds support Ontario solar projects using a co-op model. We’re invested in co-working spaces dedicated to social innovation through CSI Community Bonds. And we’re financing social enterprises led by young entrepreneurs through the Youth Social Innovation Capital Fund.
"One of the most exciting things about investments like CoPower Green Bonds and Solar Bonds is that they’re newly accessible to retail investors (everyday people) like Jill and I."
Each issuer provides us with regular financial reports as well as positive stories about how our investments are affecting change. It’s a refreshingly transparent approach in an industry where funds contain holdings with names like “iShrCrMSCI EAFEIMIHG” (actually). Clear as mud if you’re not an investment professional.
One of the most exciting things about these investments is that they’re newly accessible to retail investors (everyday people) like Jill and I. Until recently, the norm was to restrict private investments to accredited investors (very wealthy people). Groups like CoPower are changing that and we feel privileged to participate.
Finally, it’s also worth noting that private fixed income bonds are generally illiquid, meaning they must be held until the end of the term. We have liquidity elsewhere in our portfolio (eg. cash and public market investments) and we’re comfortable leaving this money put for the time being, but this is an important consideration if you think you’ll need the cash.
Our Global Public Equity Investments
Our most recent impact gains came via five new global public equity investments -- three mutual funds and two exchange-traded funds (ETFs).
Starting with the mutual funds, all three select companies that are top performers along environmental, social, and governance metrics. The NEI Environmental Leaders Fund invests in companies whose primary business contributes to environmental solutions in the water, energy efficiency, waste management, and sustainable food sectors. The underlying holdings in the AGF Global Sustainable Growth Equity Fund must significantly contribute to clean energy, waste management and pollution control, water and waste water solutions, health and well-being. The Meritas SRI International Equity Fund chooses best-in-class performers using financial, social and environmental factors as a screen. And while Meritas doesn’t explicitly choose companies contributing to the UNSDGs, a look at their holdings leads me to believe that many of these companies earn significant portions of their revenue through products and services that generate positive social and environmental impact.
No discussion of mutual funds would be complete without pointing out the fees. These three funds are professionally managed and their success depends on the skill (and luck) of the managers. Active management can be rewarding, but it comes at a cost in the form of a management expense ratio. For these funds to financially outperform their benchmarks, they need to do so after subtracting their fees.
In an attempt to lower costs associated with our portfolio, we also invested in two global public equity ETFs. ETFs generally track an index, and because they’re passively managed they come with lower fees.
Like our mutual funds, our new ETFs employ an ESG screen. The iShares MSCI Global Impact ETF holdings earn a majority of their revenue by contributing to the UNSDGs and are selected based on financial criteria and positive impact performance. Based on the thesis that carbon efficiency leads to higher long-term profitability, the Etho Climate Leadership US ETF chooses companies that are the most carbon efficient compared to their industry peers. In both cases the funds’ strategies appear to be paying off. Since launching in 2015 and 2016 respectively, the MSCI Impact ETF has outstripped the benchmark MSCI ACWI index as reported on Morningstar; and the Etho Climate Leadership US ETF has outperformed the S&P 500 (as of today’s date) according to data from the company's own site.
In general, this more passive and low-cost approach to public market investing is attractive to us and based on their financial and impact track records we were comfortable allocating 22% of our overall portfolio to these two ETFs.
"Our experience so far reflects the growing body of research showing that impact investments can meet or exceed the financial performance of traditional investments"
Next steps: Alternatives & Canadian Public Equity
Currently, our only alternative investment is in Brookfield Renewable Partners, one of the largest independent renewable power businesses in the world, but we’ll soon be working to add more to this part of our portfolio. Our target allocation is 15% as we expect this asset class to increase the overall financial and impactful success of our portfolio.
Examples of alternative investments with the potential for high financial and impact returns include a) private equity funds that focus on themes like water, sustainable agriculture, or gender equity; and b) infrastructure funds that finance projects like hospitals, schools, and clean energy.
Finally, Canadian public equity will be the last piece of the puzzle for our 100% impact portfolio. Our resource-based economy does make this more of a challenge and we’re in the process of developing a strategy to tackle this asset class. One option may be to invest in mid and small cap funds, and we’ll be updating readers on our progress.
"We’re betting that companies seeking solutions to our world’s social and environmental problems will financially outperform companies that cause the problems."
It’s early days for Jill and I, but our experience so far reflects the growing body of research showing that impact investments can meet or exceed the financial performance of traditional investments.
Based on our research we’re betting that the value of fossil fuel investments will fall once regulations and market pressure restrict companies from extracting and burning their reserves; while global investment in renewables grows. We’re betting that companies seeking solutions to our world’s social and environmental problems will financially outperform companies that cause the problems. In other words, we’re betting on a better future.
This blog is not investment advice nor an investment recommendation. Making good investment choices is as much as your personal goals and preferences as it is about predicting where the market will go. These choices made sense for Jill and I given our circumstances and your ideal portfolio will likely look different from ours. We highly recommend seeking independent professional investment advice.
Header Photo Credit: Taha Muharuma
Editor's note: Jory invested in CoPower's second issuance of Green Bonds (Green Bond II). Our third issuance (Green Bond III) is now available for investment. This blog was solicited by CoPower and may not be representative of the views of other investors or potential investors in CoPower Green Bonds. Please consult the CoPower Green Bond Offering Memorandum for all material information in respect of CoPower Finance Inc., CoPower Green Bonds and the terms of the offering of CoPower Green Bonds.