The Negative Impact of Impact Investing

Impact investing: an investment tactic where ROI is secondary to being socially and environmentally “woke”
November 2, 2020

The U.S. has come to an unfortunate place where activists demand that companies not only serve a unique purpose and make a profit, but also act as stewards of the social and environmental justice whims of the day. One of the newest ways political activists are promoting this philosophy is through “impact investing” – an investment tactic where return on investment (ROI) is a secondary consideration to being socially and environmentally “woke.”

Environmental, Social and Governance (ESG) shareholder proposals are a common strategy of impact investors seeking to achieve a political agenda. From 2016 to 2017, the number of ESG proposals in annual meetings rose from 31% to 41%. In the 2020 proxy season, it was very common to see a majority of shareholder proposals in the ESG realm. Striving to meet certain ESG standards isn’t necessarily a bad goal for a company; however, many companies are dragged through political smears if they fail to comply in exactly the manner these activists deem satisfactory. ESG standards often take years to achieve, come with hefty price tags and often offer little or no return on investment for shareholders.

Impact investors might come from a place of conscience, but they give little attention to whether improvements in these areas will also increase the company’s profitability. That makes for a poor investment strategy. Conversely, a company who focuses on environmental, social or governance initiatives for the good of their employees, investors and bottom line should be celebrated. 

For example, in 2005 Walmart was experiencing stagnant stock prices; meanwhile, their CEO, Lee Scott, was passionate about the environment. Walmart leadership went on a sustainability journey around the globe to learn how they could implement changes that would benefit the environment and their revenue without also increasing prices for consumers.

“What if we used our size and resources to make this country and this earth an even better place for all of us: customers, associates, our children and generations unborn?” Scott asked at his project’s announcement. The changes Walmart put in place produced significant positive impacts to the environment and also improved Walmart’s bottom line (an added $150 million in 5 years). Their fleet truck efficiency doubled within a decade and Walmart began converting stores to use renewable energy sources. They even stocked the shelves with sustainable products without significantly raising prices for their consumers who are loyal because of Walmart’s low prices. 

As investors, whether large or small, we should reject the idea of forced social, environmental or governance initiatives at the hands of corporate pressure campaigns. Businesses should not be politicized into making decisions that cause them to stray from their core mission and fiduciary duty to their shareholders. The bottom line is that businesses should be neutral. Businesses should focus on what they do best–business.