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Impact Investing Cleared for Take-off

Improving Data and New Labor Department Guidance Address Two Big Hurdles for Investments Tied to Social and Environmental Issues; Merrill Lynch Wealth Institute Whitepaper and Investor Survey Examine the Evolution of Impact Investing

Monday, November 9, 2015 10:00 am EST

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NEW YORK

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"More of our clients want their portfolios to reflect their beliefs on issues such as social mobility, climate change, women’s rights and other key issues"

Two major hurdles to the broader adoption of impact investing are being cleared by structural changes in the capital markets and new guidance issued by the Department of Labor that makes it easier for retirement plans to offer environmental, social and governance (ESG) solutions to investors planning for retirement.

In a new whitepaper published today, “Impact Investing: The Performance Realities,” Merrill Lynch analyzes these structural changes and the growing body of evidence showing that investors can do well financially by investing in organizations that are doing what’s right for the environment and society. The paper tracks key developments in the impact investing arena, pointing to rapid growth and innovation that are due largely to growing client demand over the past decade, as well as the improving quantity and quality of ESG data.

A recent Merrill Lynch client survey of 1,500 U.S. investors found that awareness and education about impact investing are also among the keys to its continuing growth.

“More of our clients want their portfolios to reflect their beliefs on issues such as social mobility, climate change, women’s rights and other key issues,” said Anna Snider, author of the paper and head of Global Equity and Impact Investing Due Diligence, Merrill Lynch Wealth Management. “Many investors have held back because of a commonly held belief that investing for a better world requires a trade-off in performance. We believe that a combination of more reliable data, enhanced portfolio construction techniques and innovation in structures and investment approaches will start to turn that outdated assumption on its head.”

“Impact Investing: The Performance Realities” assesses the real state of impact
In developing the whitepaper, Merrill Lynch analyzed proprietary, academic and industry data to gain insight into the impact investing landscape. Key findings include:

  • Many impact investments can be used in a market-based portfolio without a significant increase in risk, and can serve to lower overall portfolio volatility and aid in the risk adjusted profile of portfolios.
  • The risks of many impact investments are not necessarily greater than their traditional counterparts, but they often are different – and understanding those risks is critical for investment decision-making.
  • Most impact-oriented, diversified public equity and fixed income strategies can provide market-like returns – and some more-targeted public and private strategies may even outperform.
  • Merrill Lynch found wide recognition that companies lacking good governance, which fail to consider environmental risks or disregard community impacts, are ignoring risks to their bottom line.
  • New public-private financing structures are gaining interest from not-for-profit organizations, policy makers and government issuers, and there’s been a marked increase in social impact partnerships, green bonds and direct capital investments in thematic ventures such as health and energy.
  • Institutional investors, who were among the first to incorporate impact investing criteria into their mandates, still account for the largest share of assets. Recent substantial growth in indexes, network services and other collaborative or aggregative sources of social responsibility data are now making it possible for all investors to use ESG data, along with traditional financial analysis, to make informed decisions about investing in sustainable companies.

Supporting client survey points to need for education and awareness
Merrill Lynch’s client survey of 1,500 U.S. investors found that awareness and education about impact investing are also among the keys to its continuing growth. The survey found:

  • Younger investors – millennials under the age of 35 – are leading the way in the demand for impact investing investments. More than any other age group, they are interested in investing in companies that share similar values and are more likely to believe they can achieve competitive returns (59 percent).
  • Millennials also place greater importance on the issues they consider important than on financial returns (47 percent).
  • Nearly one-half (48 percent) of the 1,500 investors surveyed would be more likely to incorporate impact investing strategies into their portfolios if assured it didn’t mean sacrificing returns.
  • Three in five (62 percent) investors aren’t yet convinced that impact investing investments can deliver competitive returns.
  • Approximately half of investors would be spurred to add ESG investments to their portfolio if they better understood them.
  • Fewer than 25 percent of investors are aware of the impact investment options available to them.

Global Wealth and Investment Management and impact investing
Bank of America’s wealth and investment businesses launched their impact investing platform in August 2013 with a range of investment offerings across asset classes and themes, extensive insight and thought leadership, and a major commitment from Bank of America totaling more than $70 billion in lending, financing and other investments, as well as $100 million in grants, over a 10-year period.

As of September 2015, Bank of America’s investment businesses had more than $9.7 billion in assets with a clearly defined impact investing approach. Of these assets, approximately $8.1 billion are assets under management and $1.6 billion are advised assets. These businesses include Merrill Lynch Wealth Management, U.S. Trust, Merrill Edge and the institutional investment business.

The risks of investing in impact investments
While there are many impact strategies that have long track records, as the investment approach is expanding, there are many strategies that may have limited performance history. Data availability and standardized frameworks are still evolving for the private and public impact investments industry and will be subject to multiple improvements in coming years. As such, reporting around the particular impacts of impact investing strategies are subject to the manager’s definition of those results, and investors should be aware of these issues prior to investment. Finally, as impact investing approaches are being more widely integrated into investment processes, it is important for investors to acknowledge that certain portfolio managers and other investors offering solutions in this space are still in their developmental stage, and investors need to be aware of these risks.

Merrill Lynch Global Wealth Management
Merrill Lynch Global Wealth Management is a leading provider of comprehensive wealth management and investment services for individuals and businesses globally. With 14,563 Financial Advisors and $1.9 trillion in client balances as of September 30, 2015, it is among the largest businesses of its kind in the world. Merrill Lynch Global Wealth Management specializes in goals-based wealth management, including planning for retirement, education, legacy, and other life goals through investment, cash and credit management. Within Merrill Lynch Global Wealth Management, the Private Banking and Investment Group focuses on the unique and personalized needs of wealthy individuals, families and their businesses. These clients are served by more than 150 highly specialized Private Wealth Advisor teams, along with experts in areas such as investment management, concentrated stock management and intergenerational wealth transfer strategies. Merrill Lynch Global Wealth Management is part of Bank of America Corporation.

Source: Bank of America Corporation. Merrill Lynch Global Wealth Management (MLGWM) represents multiple business areas within Bank of America’s wealth and investment management division including Merrill Lynch Wealth Management (North America and International), Merrill Lynch Trust Company, and Private Banking and Investment Group. As of September 30, 2015, MLGWM entities had approximately $1.9 trillion in client balances. Client Balances consists of the following assets of clients held in their MLGWM accounts: assets under management (AUM) of MLGWM entities, client brokerage assets, assets in custody of MLGWM entities, loan balances and deposits of MLGWM clients held at Bank of America, N.A. and affiliated banks.

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