Impact and ESG Investing - and Doing Right With Your Money
Today more than ever, people want to invest their money with an eye on doing good. Everyone from foundations to pension funds to private investment analysts are looking to exclude investments in tobacco and alcohol companies, firearms manufacturers, and fossil fuels from their portfolios while simultaneously increasing investments in companies that are actively helping society and our environment as part of their business practices.
However, the precise motivations of different investors may vary, and there’s a veritable alphabet soup of acronyms and other jargon that have emerged to try and describe these different approaches. What’s the difference between socially responsible investing (SRI), responsible investing, and sustainable investing? What about environmental and social governance (ESG) investing? Confusingly, these terms often overlap each other, and even some prominent stakeholders like the U.S. Forum for Sustainable and Responsible Investment and even Goldman Sachs might lump them together sometimes!
While it might be awhile before everyone agrees on a common terminology, it’s useful to separate investment strategies based on what they prioritize. Some investors seek to maximize financial returns through the means of considering social and environmental factors in evaluating a firm’s likely performance, while others seek first to create social and environmental benefits while also achieving competitive financial returns.
Environmental, Social, and Governance (ESG) Investing
One type of investment strategy is environmental, social, and governance (ESG) investing, sometimes simply called responsible or sustainable investing. ESG investors look at these factors not on their own merits but through the lens of their material impact on financial returns, under the assumption that firms that pay attention to ESG factors are better-managed and deliver superior long term financial results. According to the UN-backed Partnership for Responsible Investing (PRI), some examples of ESG factors include:
- Environmental: Climate change and greenhouse gas (GHG) emissions, resource depletion (including water), waste and pollution, deforestation
- Social: Working conditions including slavery and child labor, relationships with local communities (including indigenous communities), conflict, health and safety, employee relations and diversity
- Governance: Executive pay, bribery and corruption, political lobbying and donations, board diversity and structure, tax strategy
Evidence is beginning to mount that these factors do indeed have a material impact on financial performance – and a growing number of mainstream investors are paying attention. A survey by the University of Oxford and Arabesque Partners of more than 200 academic studies, industry reports, newspaper articles, and books found that 88% of research showed that strong ESG practices resulted in better operational performance of firms, 80% showed benefits for stock price performance, and 90% found lowered costs of capital. The authors of the report called the move to incorporate ESG factors in mainstream investment analysis is “one of the most significant trends in financial markets for decades.”
In fact, ESG investing is becoming such a mainstream phenomenon that in a landmark ruling in October 2015, the U.S. Department of Labor found that ESG factors can be “proper components of the fiduciary’s analysis” of potential investment and thus are appropriate for inclusion in the formulation of retirement plans under the Employee Retirement Income Security Act. The rise of ESG isn’t limited to the U.S. either – over the past decade, the PRI has increased from less than 100 signatories to nearly 1,500 signatories from over 50 different countries, and the amount of assets they manage has increased from less than $5 trillion to nearly $60 trillion in April 2015!
Partnership for Responsible Investing (PRI) Signatories and Assets
(Source: Partnership for Responsible Investing)
This all gives ESG investing a very broad relevance, since in the words of PRI, these principles “should be pursued even by the investor whose sole purpose is financial return, because… to ignore ESG factors is to ignore risks and opportunities that have a material effect on the returns delivered to clients and beneficiaries.” At the same time, the primary focus of ESG investing is still maximizing financial returns, so it may not be your first choice if you’re looking to maximize the good you do while still investing wisely.
Impact and SRI Investing
Impact investing, sometimes referred to as Socially Responsible Investing (SRI), seeks to generate social and/or environmental benefits in addition to financial returns. Unlike the ESG investment strategies described above, impact or SRI investing prioritizes these environmental and social benefits on their own merits, and not merely as a factor that can influence financial returns. According to the Global Impact Investing Network (GIIN), there are at least 350 impact investing vehicles operating worldwide, and over 220 organizations have joined GIIN. Mosaic has been cited as an example of impact investing in action, since its innovative original business model enabled investors of any size to generate reliable returns through investments in solar projects that also delivered environmental benefits.
Some mainstream investors have been skeptical of impact investing due to a lack of supporting data. To combat this, GIIN and the consultancy Cambridge Associates created the Impact Investing Benchmark, which was introduced in 2015 and showed that impact funds can attain market-rate returns. An analysis of the performance of social impact funds that sought to achieve risk-adjusted market rate returns from 1998-2010 showed that overall these funds delivered returns of 6.9% to investors versus 8.1% for comparable funds. Even more encouragingly, funds of under $100 million actually delivered returns of 9.5% to investors – more than double the 4.5% returned by comparable non-impact funds of under $100 million!
As data becomes more robust and shows that investing to generate positive impacts on the world can still achieve market returns, it’s likely that interest in this fast-growing sector will continue to increase. Impact investments in clean energy in particular are drawing more and more attention after the international climate agreement in Paris, and GIIN has highlighted the special importance of investments in solar energy for populations in developing countries that lack electricity access and depend on expensive and polluting fuels like kerosene. That said, as Mosaic has shown, there’s plenty of room for clean energy-focused impact investing right here in the U.S.!
Doing Good for the Environment – and Your Own Finances – With Mosaic
Mosaic is proud to be a Certified B Corporation, which holds us to rigorous standards of environmental and social accountability and performance. The values of impact and ESG investing have been core to our identity from day one, and today our mission is focused on helping you make an environmentally and financially responsible investment in your own home by going solar. Click here to get a free quote and find out how much you can save!
Mosaic and the Evolution of Clean Energy Investing
As we’ve covered in sections on impact and ESG investing, skyrocketing clean energy investments, and the fossil fuel divestment movement, a lot has changed in the world of clean energy investing over the past five years – and, perhaps more than any other company, Mosaic has been on the front lines of virtually all of these trends!
To understand the evolution of Mosaic, you need to go all the way back to 2002, when Mosaic co-founder Billy Parish was a student at Yale University. He helped co-found a grassroots network of student-run activist groups called the Energy Action Coalition that eventually became the largest youth clean energy organization in the world, with over 300,000 members. The Coalition’s mission was to drive a shift of power and profits away from fossil fuel companies and towards those building a new clean energy economy that would enable people and the planet to prosper.
At the Coalition’s first national youth climate summit in 2007, Parish connected with his friend Dan Rosen over their shared goal of putting this ideal into practice. They would create a new kind of company that not only catalyzes the transition away from fossil fuels to renewable energy but lets everybody profit from these clean energy investments, not just the big banks and utility companies.
“The Kickstarter for Solar”
Billy Parish announced the founding of Mosaic in a speech at the 2011 Power Shift summit, calling it a response to the question “how can we develop and own our own energy sources?”
Mosaic answered this question by creating a platform that rapidly gained attention as “the Kickstarter for solar.” It allowed people to come together to propose and crowdfund solar projects in their communities – for instance, rooftop solar installations on a church or a cultural center. And in 2013, it was officially registered with the Securities and Exchange Commission (SEC) to offer shares of its solar projects to the public, offering estimated returns of 4.5% or more on investments of as little as $25. Ultimately, Mosaic enabled clients to invest over $10 million in solar projects that have generated over 30 million kilowatt-hours of zero-emission electricity!
This crowdfunding model helped to inspire the rise of today’s community solar industry, which allows people that either can’t put solar on their roofs or simply can’t afford the cost to own or lease a portion of a shared solar installation. This fast-growing market is helping facilitate widespread access to the energy cost savings as well as the empowerment that comes from joining the solar movement.
Bringing Solar Investing Home
While the success of these crowdfunded solar projects was encouraging, Mosaic wanted to bring solar investing even closer to home. In 2014, it began offering residential home solar loans, which allow individual homeowners to go solar for zero money down and reap savings on their electricity bills by generating their own zero-carbon energy. While the residential solar sector was already growing rapidly thanks to the rise of solar lease-based models, Mosaic believed that they could offer homeowners a better deal and truly empower them by allowing them to own their solar systems outright with loan financing.
Just like owning versus leasing a car or your home, this insight turned out to be correct. A recent study by the National Renewable Energy Laboratory (NREL) estimates that owning solar, whether through cash purchase or with loan financing, can save up to 30% more over the long term compared to leasing alternatives. Indeed, Mosaic customers in California save an average of $67,000 over the life of their investment! This incredibly appealing value proposition has expanded Mosaic’s reach very quickly, leading to over $100 million in loans to help people go solar over the past two years.
Going Solar With Mosaic
From its inspiration in climate activism to its founding as a crowdfunding platform to its evolution towards the home solar market, Mosaic has been linked to the trends driving renewable energy growth every step of the way. Click here to get a free quote to find out how much you can save by joining the clean energy movement with the help of one of the industry’s most forward-looking and trusted pioneers.