Market Decode: Is impact investing right for you?

Discover how to invest in a way that can bring about positive effects in today’s changing world.

Market Decode: Is Impact Investing Right for You?

With Jackie VanderBrug

Head of Sustainable & Impact Investment Strategy

Merrill and Bank of America Private Bank

Please see important information at the end of this program. Recorded on July 12, 2018.

Jackie VanderBrug:

Hi, I’m Jackie VanderBrug with the Chief Investment Office at Bank of America.

Impact Investing is increasingly part of main stream news headlines. And lately, I’ve been getting more and more questions from people asking, “What is it?”

Here’s what I tell them: Impact investing combines the desire to make the world a better place with the goal of earning a competitive return on your investments.

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Impact Investing

Making the World a Better Place

Potential for Competitive Results

So how exactly does that work?

Well, let’s take the first part of that definition and apply it to you. Think about the issues that, for you, would make the world a better place. The issues you want to have an impact on.

Let’s say you’re concerned about the environment, like climate change and energy and water conservation, or social concerns, like workplace policies that support diversity and inclusion and gender pay equity.

Perhaps you value companies that have strong governance policies. For example, in promoting shareholder rights, or having a diverse board of directors.

These issues, or others that reflect your personal values, can now be factored in when you make your investment decisions through a framework called E-S-G, for Environmental, Social and Governance.

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Sustainable Practices

In recent years, this framework has become a way for investors of all kinds to measure a company’s progress in implementing sustainable practices.

And more and more companies are realizing its value—and providing information to investors on their progress.

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Diagnostic Tool

Think of this framework as a diagnostic tool for impact investing.

Just like a doctor will use an X-ray to help make a clinical decision, ESG provides additional information that you and investment firms can use to gain deeper insights on the inner operations of companies.

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Investment Funds Incorporating ESG Factors (1995-2018)

Source: US SIF Foundation, as of 2018.

In the past 20 or so years, the number of investments funds that utilize ESG data has risen dramatically.

And now they can cover all the major asset classes, including stocks and bonds, and different countries and regions too.

Here’s where the second part of our definition comes in: The goal of making a competitive return.

There is growing data showing that impact investing may potentially produce long-term returns that are as good as or even better than “traditional” investing.

Findings from BofA Global Research show that companies with high ESG ratings tend to be healthier financially, and less likely to go bankrupt, than those with lower scores.

It also found that ESG is a strong predictor of a company’s future earnings performance.

That means there’s a link between companies’ sustainable practices and their overall financial health.

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Equity Strategy Focus Point

ESG: good companies can make good stocks

We are only in the early innings of a US ESG boom

Not only do ESG attributes appear to be good signals of future performance and risk, but growth in the US is just gathering momentum.

Source: Good companies can make good stocks, BofA Global Research, Dec. 18, 2016.

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Equity Strategy Focus Point

ESG: good companies can make good stocks

ESG could have helped investors avoid 90% of bankruptcies

Based on our analysis of companies with ESG scores that declared bankruptcy, an investor who only held stocks with above average-ranks on both Environmental and Social scores would have avoided 15 of the 17 bankruptcies we have seen since 2008.

Source: Good companies can make good stocks, BofA Global Research, Dec. 18, 2016.

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Equity Strategy Focus Point

ESG: good companies can make good stocks

ESG has signaled future volatility & stock price declines…

Large companies within the highest quartile of the ESG framework tended to have consistently lower future price volatility than poorly ranked companies. Stocks with extreme price declines —over 90% — had average initial

Environmental/Social scores in the 40th or lower percentiles. And the better a stock’s score, the lesser the price decline.

Source: Good companies can make good stocks, BofA Global Research, Dec. 18, 2016.

Keep in mind that impact investing is not a short-term approach. Big changes don’t happen quickly and companies understand it may take a while for the practices they implement today to see results.

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Impact Investing

• Not short-term approach

• Doing well = Doing good

• Competitive return potential

But if the idea of investing in companies that are doing well while doing good with the potential to earn a competitive return is appealing to you, then impact investing may be worth exploring.

IMPORTANT INFORMATION

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.

All recommendations must be considered in the context of an individual investor’s goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest for all investors. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

The views and opinions expressed are those of the speakers, were current as of July 12, 2018 and are subject to change without notice at any time, and may differ from views expressed by Merrill, Bank of America Private Bank or any of their affiliates. These discussions are provided for informational purposes only and should not be used or construed as a recommendation of any service, security or sector.

The investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance and investment goals.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. All sector and asset allocation recommendations must be considered by each individual investor to determine if the sector is in the best interest for their own portfolio based upon their own goals, time horizon, and risk tolerances.

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THE IDEA OF SUSTAINABLE AND IMPACT INVESTING has been around for several decades, but it used to mainly involve “negative screening,” or avoiding investing in companies and industries whose products or practices do not meet investor standards. It has changed a lot since then: Today, sustainable and impact investing can be thought of as investments that seek positive social and environmental effects while targeting competitive financial returns. There’s now a wide range of investment options to choose from to fit your interests and needs.

As of 2019, there were more than 300 sustainable funds that intentionally integrate sustainability data into their investment process and an additional 564 investment solutions that take environmental, social and governance (ESG) data into consideration.¹ And more and more companies are responding to growing investor interest. As the graphic below shows, in 2011, only 20% of companies in the S&P 500 published annual reports on their ESG data and practices. In 2019, that number had jumped to 90%.²

Bar chart graphic showing growth of ESG reporting by S&P 500 companies between the years 2011 and 2019. For 2011, it shows that 80% of companies were non-reporters and 20% were reporters, for 2012 it shows that 47% were non-reporters and 53% were reporters, for 2013 it shows that 28% were non-reporters and 72% were reporters, for 2014 it shows that 25% were non-reporters and 75% were reporters, for 2015 it shows that 19% were non-reporters and 81% were reporters, for 2016 it shows that 18% were non-reporters and 82% were reporters, for 2017 it shows that 15% were non-reporters and 85% were reporters, for 2018 it shows that 14% were non-reporters and 86% were reporters, for 2019 it shows that 10% were non-reporters and 90% were reporters. The source is the Governance and Accountability Institute, Inc., 2019

What’s more, research suggests that investors don’t have to sacrifice long-term growth when investing for impact. BofA Global Research found that a strategy of buying stocks that rank well on ESG metrics would have outperformed the broader market by up to 3 percentage points per year over the last five years.³ “There is growing data showing that impact investing may potentially produce long-term returns that are as good as, or even better than, traditional investing,” says Jackie VanderBrug, head of Sustainable and Impact Investment Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank, in the above video.

“It just makes sense,” she adds. “Companies that are driving efficiency in water, waste and energy can help lower their costs, and better workplace policies may lead to more employee engagement and stronger revenues over the long term.”

Visit our sustainable and impact investing page for more insights into our approach to investing for impact, and then speak with your advisor about how you can get started.

¹Morningstar, Sustainable Funds U.S. Landscape Report, 2020

²Governance & Accountability Institute, Inc., 2019

³““ESG from A to Z: a global primer,” BofA Global Research, November 2019

S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the index focuses on the large-cap segment of the market, with approximately 80% coverage of U.S. equities, it is also an ideal proxy for the total market.

This material does not take into account a client’s particular investment objectives, financial situations, or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. For more information about these services and their differences, speak with your Merrill financial advisor.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S" or “Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation.

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.