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Sustainable and Impact Investing: A Taxonomy of Approaches and Considerations for Fiduciaries

Mark Hays and John McCabe
The Journal of Wealth Management Fall 2021, 24 (2) 10-24; DOI: https://doi.org/10.3905/jwm.2021.1.139
Mark Hays
is the director of Sustainable & Impact Investing at The Glenmede Trust Company, N.A., in Philadelphia, PA
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John McCabe
is Chief Fiduciary Counsel at The Glenmede Trust Company, N.A., in Philadelphia, PA
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Abstract

The application of sustainable and impact investing approaches to the management of investment portfolios has risen dramatically over the past three years due to a convergence of factors, including increased cross-generational interest and the enhanced ability of asset managers to utilize these approaches when seeking strong risk-adjusted returns. But two key challenges hold many asset owners and managers back from taking action: 1) confusion over the differences among the vast array of sustainable and impact investing disciplines and 2) lack of clarity on whether and how investors who serve in a fiduciary capacity can incorporate these disciplines. In this article, the authors introduce a taxonomy of sustainable and impact investing approaches, mapped to a set of guidelines for fiduciaries to consider in practice. This framework, based on a mix of market, legal, academic, and internal risk/return research, provides investors with guidance on applicability by ESG approach by account type, ranging from investment management accounts (both nondiscretionary and discretionary) to revocable and irrevocable trusts, to ERISA accounts. The sustainable and impact investing industry is at an inflection point where further growth will need to be supported by clear and well-supported frameworks—and this article serves to provide them.

TOPICS: ESG investing, foundations & endowments, portfolio construction, performance measurement

Key Findings

  • ▪ Despite significant growth in interest and inflows over the past three years, sustainable and impact investing has reached an inflection point where the industry is being held back by a lack of clarity on definitions and fiduciary applicability.

  • ▪ Sustainable and impact investing can be split into four distinct approaches: ESG integration, ESG mandated, thematic, and high impact concessionary.

  • ▪ A strong fiduciary framework with limits for the application within each approach should be guided by a focus on rigorous risk-adjusted return analysis, clear documentation, and checks and balances on implementation and ongoing monitoring. The authors offer a framework to align different types of ESG investments with various investment and fiduciary mandates.

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The Journal of Wealth Management: 24 (2)
The Journal of Wealth Management
Vol. 24, Issue 2
Fall 2021
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Sustainable and Impact Investing: A Taxonomy of Approaches and Considerations for Fiduciaries
Mark Hays, John McCabe
The Journal of Wealth Management Jul 2021, 24 (2) 10-24; DOI: 10.3905/jwm.2021.1.139

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Sustainable and Impact Investing: A Taxonomy of Approaches and Considerations for Fiduciaries
Mark Hays, John McCabe
The Journal of Wealth Management Jul 2021, 24 (2) 10-24; DOI: 10.3905/jwm.2021.1.139
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  • Article
    • Abstract
    • MARKET EVOLUTION
    • CONVERGENCE OF FACTORS SPURRING GROWTH
    • SHIFTING DEMOGRAPHICS AND SOCIETAL DYNAMICS
    • INCREASED RESEARCH LINKING FINANCIAL MATERIALITY OF ESG FACTORS
    • CHALLENGES HOLDING BACK THE INDUSTRY
    • OVERVIEW OF SUSTAINABLE AND IMPACT TAXONOMY, SUPPORTED BY MARKET RESEARCH
    • FIDUCIARY APPLICABILITY BY SUSTAINABLE AND IMPACT APPROACH AND ACCOUNT TYPE: A FRAMEWORK
    • RIGOROUS INTERNAL STRATEGY REVIEW PROCESS
    • CLEAR DOCUMENTATION PROCEDURES
    • ALLOCATION LIMITS
    • OVERSIGHT
    • CONCLUSION
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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