20 Ways To Define Impact Investing

The alphabet soup nomenclature that is do-gooder investing can be a tad confusing. There’s ESG and SRI (two versions), and “impact investing” is now a buzz phrase. The basic aim of these types of investments is to do good both for your portfolio and for the world, but the criteria isn’t always clear.

“Some of those funds with impact in their name don’t really fit the definition of impact,” says Scott Sacknoff, CEO of SerenityShares Investments LLC, which earlier this month launched the SerenityShares Impact ETF (ICAN), the newest exchange-traded fund within the broadly defined category of socially responsible investing.

As Sacknoff describes it, impact investing evolved from ESG (environmental, social and governance) investing, which in turn evolved from SRI (socially responsible investing), though that acronym also stands for sustainable, responsible and impact investing.

“Socially responsible investing for the most part creates negative screens—no tobacco, oil or gas exploration or weapons or things like that,” he explains. “ESG is evolving into looking into companies and assigning them a rating based on, unfortunately, arbitrary factors.”

To remedy what Sacknoff believes are those arbitrary factors, the SerenityShares Impact ETF employs a methodology that delineates the space into 20 categories that benefit the world such as clean water, healthy foods, elder care, local access to health care and the like.

“We start with ‘here’s the challenge and the products and services that overcome the challenge, now let’s figure out which companies are in there,’” Sacknoff says. “We actually review every single company to make sure where they fit into these categories.”

ICAN—the symbol draws on the concept of “I CAN” make an impact—tracks the Spade Impact Index developed by Sacknoff that analyzes all 6,500-plus companies listed on the NYSE and Nasdaq; eliminates companies involved with tobacco, weapons, and oil/gas/coal exploration; and selects companies that meet market cap and liquidity screens.

The index is organized into six pillars: environmental stewardship; resource scarcity; societal goals; living a healthy lifestyle; new initiatives; and empowerment. From there, the index is broken down into 20 themes. For example, “education and education infrastructure” falls under the empowerment pillar while the theme of “community building” fits into the pillar of societal goals.

That explains the presence of top-10 holding Walt Disney Co. “There’s no company that symbolizes community building probably better than Disney,” Sacknoff explains. “People find a common theme [relating to Disney’s popular products] and they can talk about it.”

The portfolio of 115 holdings is a diverse lineup from various sectors, with top five holdings of Alphabet Inc., Netflix Inc., CVS Health Corp., Facebook Inc. and Honeywell International Inc.

The top 10 also includes General Electric Co., which might surprise impact-oriented investors. GE has made a big marketing push with its “ecoimagination” strategy the company defines as a way “to enhance resource productivity and reduce environmental impact at a global scale through commercial solutions for our customers and through our own operations.”

Yet the company has boosted its oil-and-gas business, and last year said it wanted to build coal power plants in developing countries. That sounds like a company doing things with a negative impact.

Sacknoff said he considered those arguments during the rebalance period. “The deciding factors for GE was their involvement in a number of key areas that were too important to overlook,” he says, noting the company is a world leader and innovator in wind and renewable energy, as well as in water systems.

Furthermore, Sacknoff says, much of GE’s energy business relates to turbines and increasing their efficiency, which means less fossil fuels used for the same output and less pollution.  

“Their recent action to spin out by merging their oil-and-gas exploration business later this year into a separate entity with Baker Hughes could make future analysis clearer,” he notes.