Impact investing refers to investments made with the intention of making a positive social or environmental impact. Impact investors also want a positive financial return. At American Bank & Trust, we strive to inform all our clients on these and other trends. While impact investing is on the rise, it is not a completely new idea.

The idea that investors should consider morals may be traced to the 1700s. The Quakers forbade their members to participate in the slave trade, for example. John Wesley, one of the founders of Methodism, advised avoiding investing in companies with practices that threatened employee health.

In the 1990s, the idea of “socially responsible investing” really took shape. Many investors avoided companies that traded in “sin” or “vice,” such as tobacco companies, gun manufacturers, casinos, and liquor companies. Others avoided oil companies.

Although screening out these firms may have made investors feel virtuous, it didn’t necessarily impact their fortunes positively. In fact, the “vice stocks” generally outperformed the market as a whole, because those companies tend to be rather profitable, paying generous dividends to their shareholders.

The Evolution of Impact Investing and ESG

A less restricting version of socially responsible investing has emerged in recent years. This version considers positive qualifiers as well as exclusions. American Bank & Trust has seen this a lot in our younger or second-generation investors. Three categories of factors are involved: environmental, social, and governance (ESG).

An environmental focus may look at carbon emissions, water safety, renewable energy, or pollution. Social factors may include diversity, inclusion, labor, employee welfare, or data security. Governance issues could touch upon independent directors, audit standards, women in leadership, and executive compensation.

Companies may be scored for their ESG performance. They may self-report, or data may be gathered by third parties. An impact investor looks at these scores combined with traditional financial analysis tools to determine which companies are likely to have the desired impact while still providing strong return to shareholders.

What about trust investing?

Individual investors are free to invest as they please. But what about the trustees of a trust? Could they go in the impact investing direction?

The Uniform Prudent Investor Act, adopted by 46 states to date, provides the legal framework within which trustees operate. Rather than focus on particular investment choices, this law looks to the performance of a portfolio as a whole. Diversification and asset allocation take precedence.

Official comments explaining the Uniform Act suggest that “social investing” may violate the duty of loyalty that the trustee owes to the trust beneficiaries. Below market returns for the beneficiaries are not an acceptable price to pay for meeting other social goals. However, at the time those comments were written, socially responsible investing was less sophisticated than it has become today.

A number of studies have since argued that impact investing does not appear to depress returns. Incorporating the ESG factors should not, by itself, impair the diversification of trust investments.

Depending upon how broadly or narrowly the terms of a trust have been drafted, impact investing may be a permissible strategy. For new trusts, they recommend adding impact investing provisions, provided that is what the trust creator wants. Older irrevocable trusts may be “decanted” into new trusts to provide this investment flexibility.

Would you like to know more?

The primary duty of every trustee is to fulfill the vision of the trustor, typically to provide family financial security. American Bank & Trust Wealth Management team chooses trust investments and manages assets for the long term. If you have questions about how trusts may benefit you and your family, or about how trust assets are invested, please bring them to us. Put our expertise to work for you!

Mark Sivertson is Senior Vice President of the Trust and Wealth Management Team for American Bank & Trust.Mark Sivertson is Senior Vice President of the Trust and Wealth Management Team for American Bank & Trust. He is a graduate of Concordia College and the University of North Dakota School of Law. 

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