Investing was for doing well. Charity was for doing good.
That was the traditional view of making money: that financial returns and personal values were incompatible. But that wall has crumbled as a new field of investments evolves, aimed not just at generating profits but producing social benefits.
That will be former governor Deval Patrick’s mission at Bain Capital, where he revealed this week he will be starting a new line of business centered on finding investments that can produce profits and address social needs.
The practice goes by many names — socially responsible investing, sustainable investing, impact investing — and good luck getting a uniform definition or widely agreed-on terminology.
“It shakes up what you and I grew up with, which is that you use your for-profit activities to maximize your financial returns, and you use your charity lever to make the world a better place by giving away money,” said Tracy Palandjian, co-founder and chief executive of Boston-based Social Finance Inc., a nonprofit that uses investment capital to try to solve social problems such as crime and poverty.
The investments are often said to have a double or triple bottom line: financial, social, and environmental. They are also about aligning investments with societal values.
“People want to have consistency between their personal morals and the way their money is being invested,” said Todd Millay, managing director of Choate Investment Advisors in Boston.
But that wasn’t always the case — or, at least, wasn’t always a choice. Here’s a brief overview of the evolution of social impact investing:
The roots of social investing in the United States trace back to at least the 1700s, when religious groups refused to invest in industries they considered harmful, such as tanneries (pollution) and liquor production (addiction), or that promoted gambling or the slave trade. In the 20th century, some mutual funds began screening out “sin stocks” — tobacco producers, weapons manufacturers, casino companies — to satisfy investors who used social criteria to guide their investment decisions.
Blacklisted companies and divestment campaigns often reflected the politics of the times: South Africa’s apartheid era, the Sudanese genocide, the pushback on nuclear power and fossil fuels. Some investors shunned companies with records of environmental abuses or human rights violations.
“It was all-around withdrawal, almost like a Cold War analogy: Let’s get out of things we don’t want to have engagement with as a way of expressing our values,” Palandjian said.
The challenge of so-called negative screening — then as in now — is that everyone’s definition of what is socially responsible differs.
“For very religious investors, you might want to screen out companies associated with abortion. For others, what matters is the environment or social justice,” said Millay. “It’s ultimately in the eye of the beholder, and it depends on their values.”
Rewarding good behavior
Over time, the industry has evolved from a strictly negative approach to a more positive one. Rather than just exclude “bad” companies, some investors target companies with laudable business missions or business practices.
That could mean industries focused on clean tech, solar power, organic foods, or healthy living. It could mean investing in Uber as a way to promote the sharing economy. It could also mean financially backing companies with diverse boards, female CEOs, strong records of product safety, good labor policies, and reasonable executive compensation.
These types of investments are often broadly categorized as “ESG,” which stands for environmental, social, governance.
Eventually the trend expanded to firms offering products or services meant to have a positive social impact. Perhaps it’s a firm making a wheelchair that can traverse rough terrain in a developing country, or one that produces low-cost eyeglasses made of recycled material, bringing affordable eye care to people who would otherwise have no access to it.
“That’s a product that’s serving a social problem or a social need, which is very different than ‘We have a female CEO’ or ‘We’re avoiding investing in companies that harm the environment,’ ” said Amelia Angella, executive director of Harvard’s Community Action Partners, which does pro bono consulting work for nonprofits.
Perhaps the latest iteration of impact investing is social impact bonds, also referred to as “pay for success,’’ in which private investors help pay for social services and get a return on their investment only if lives are improved.
Paul Hilton, a partner at Boston-based Trillium Asset Management, a pioneer in socially responsible investing, says millennials are a major driver of this trend and will continue to steer the conversation as they get older.
“These are folks coming out of school having taken a combination of courses in women’s studies and environmental studies and social entrepreneurship,” he explained, “and they come out saying, ‘Why can’t I start a company that’s going to make billions of dollars and also change the planet for the better,’ ” or invest in companies that fit that profile?
The shift is also driven by charitable endowments that want their investment portfolios to align with their social values, who realize they can have a positive social impact not only through where they donate their money, but how they invest it.
Lower fees, wider availability
Initially, socially minded investors were mostly limited to US companies because their track records were easier to vet than companies overseas, especially in emerging markets.
But with the widespread availability of data, that vetting is now easier, enabling clients to have their entire portfolios invested this way.
Similarly, socially responsible investment funds used to come with higher fees because of the research costs associated with vetting claims of social responsibility. That made them less appealing investment options to some. But those fees have come down as firms become more transparent about their environmental records and corporate governance.
Socially responsible investments also sometimes meant lower financial returns. In other words, you would have to make peace with subpar profit margins by hoping your investment did some good.
“The downside there is you can end up with a lousy investment that really doesn’t have much social impact,” said Millay, of Choate. “That’s a gray zone you don’t want to be in as an investor.”