Magazine

Using Downturns to Increase Your Portfolio’s Impact

By Emily Green

It feels a little bit too much like 2020 right now, what with COVID spikes, businesses closing — and stock market whiplash. If looking at your investment portfolio feels uncomfortable, we don’t blame you. But the truth is that this volatility is not like that volatility. This time, it’s not uncertainty about a shutdown (aka the economy slowing), but rather inflation and interest rates (aka the economy moving too fast).

But in all the midst of all the chaos, there could be a silver lining: the opportunity to use this downturn to shift away from investments you don’t want to own and into ones that could make a positive impact — on both your portfolio and the world.

Why impact investing?

Since the beginning of the pandemic, things have gone backward for women — the wage gap has widened, women’s labor force participation has decreased dramatically, and women have been much more affected by the struggle to balance working from home and taking care of children. Yes, I’m talking about the She-cession.

At the same time, the climate crisis is worsening. California more than doubled its previous annual wildfire record; a historic wave of winter weather hit Texas and the eastern US, leaving 10 million people without power; and Australia was inundated with historic floods.

Forced to take a step back from our daily lives over the past two years, many of us have begun to question what’s really important and how we might make the world better on the other side. Many of us are prepared to make future purchasing decisions based on our values. But it’s not just about where we spend our money — it’s about where we invest it, too.

Impact investing — intentionally choosing to own investments that can help the world and shifting away from those that may cause harm — is one actionable and immediate way you can support companies that are poised to help the world. And it’s not just the “right” thing to do; we also believe that it’s a responsible investment decision.

One way to vet companies for potential impact is by focusing on ESG factors — choosing investments that have high environmental, governance, and / or social practices and standards. It stands to reason that companies with strong governance practices, and stronger relationships with their customers, suppliers, employees, and community, are more likely to weather a crisis like this one and come out stronger on the other side.

In fact, a study by Morningstar shows that ESG investments can be more resilient during downturns and help reduce portfolio volatility. That tracks with what’s happening today: While it's common for nearly all equities to drop during volatility like this, recent research does show that ESG-oriented funds and companies performed better than their peers during the March 2020 downturn.

It may make sense to act now and use this opportunity to position your portfolio in a way that reflects the world you want to see. That way, after this volatility subsides and you aren’t as worried about negative financial returns, your portfolio will be in a better position to benefit, from both a financial and impact perspective.

Why during the downturn?

We went almost two years with above-average market returns (the S&P 500 is still up almost 100% from its low point in 2020), and the investments in your portfolio may have appreciated since you bought them. That usually means you have unrealized capital gains — and you generally have to pay taxes on those if you sell the investments. So it’s understandable if you’ve been reluctant to make major changes to your portfolio for tax reasons.

But with the market in a downturn, some of those unrealized gains may have flipped to unrealized losses — which could give you the opportunity to reduce some or all of the taxes you’d owe on gains. You may also just have smaller unrealized gains, so at least they’d cost you less in taxes than they would have before. Both of those scenarios could make for a smart opportunity to restructure your portfolio right now, shifting away from investments you no longer need or want and into those that may better align with your values.

For example, let’s say you own stock in ABC Oil Company, which you’ve been meaning to sell because you’ve read studies that show it’s one of the top contributors to energy-related carbon dioxide in the world. Or maybe you own XYZ Holdings Company, and you’d prefer not to because you’ve learned that it’s been marketing exploitative payday loans (which, by the way, are lent to women more often) during the downturn.

A few months ago, selling those positions would have caused you to owe significant capital gains taxes. You might be tempted to wait it out to see if those stocks recover — but why do that if you’d rather not own them anyway? Perhaps today you can sell them for a smaller capital gain, or even offset the gain with a capital loss to reduce taxes, and reinvest that money into companies that you’re excited to support.

Through all the ups and downs of the past two years, we have worked with our private wealth clients to actively transition their portfolios into Ellevest Intentional Impact Portfolios,* which are focused on companies with higher environmental, social, and governance standards. These kinds of practices and higher standards can help them more effectively manage through crises. We help clients shift away from companies that fail the criteria we’ve developed and into companies with similar risk and return characteristics but stronger ESG standards, practices, and policies that benefit and advance women.

We — and the world and the economy — will get to the other side of this. While it often feels like there’s not much we can do in the midst of this downturn, we can think deeply about the impact we want our money to make on the world. And back to that silver lining: When investing in companies that better align with your values can potentially make your portfolio more resilient and help offset taxes, the time might well be now.


Disclosures

Ellevest’s Intentional Impact Strategy (the “Impact Strategy”) is a separately managed equity portfolio that is sub-advised by Ethic, Inc., (“Ethic”), an SEC-registered investment advisor. As sub-advisor, Ethic constructs and manages portfolios of individual stock positions benchmarked to an underlying index and customized to specific values criteria. The sub-advisor seeks to track the performance of a designated equity benchmark (domestic and / or international) while outperforming on impact across key sustainability criteria as defined by Ellevest and / or the client.

The Impact Strategy sustainability criteria are based on risks in the following categories: Ethics and Fraud, Greenhouse Gas Emissions, Exploitative Products, Product Quality and Safety, Working Conditions, Labor Relations, Workplace Diversity, Waste, Water, Human Rights and Community, War, Firearms, Low Employee Representation (gender), Low Management Representation (gender), Low Board Representation (gender).

Some of the key risks for the investing in Ellevest Intentional Impact Portfolio include:

Market Risk
As with all publicly traded securities, the Impact Strategy is exposed to market risk, the risk of losses arising from fluctuations in market prices caused by factors independent of a security’s particular underlying circumstances.

Active Risk
The Impact Strategy is expected to comprise around 300 US-listed equities (including ADRs as applicable) chosen through an outsourced multi-factor optimization software and sustainability data science developed by Ethic to minimize tracking error. This was developed to allow clients access to broad equity market exposure with the goal of keeping average tracking error low over the long term of less than for the Portfolios is under 1.50%.

Although the Impact Strategy is constructed to minimize tracking error relative to its benchmark, there is no assurance that the strategy will generate market returns within the estimated tracking error. Because the Impact Strategy is designed to capture investment returns associated with gender diversity, and high environmental and governance standards, the Impact Strategy may exclude, overweight, or underweight individual companies and/or sectors of the market. As a result, the Impact Strategy will not fully participate in the market returns of a general investment strategy. The Impact Strategy may over or under-perform a general market strategy.

Sub-Advisor Risk
The success of an account’s investment through sub-advisors is subject to a variety of risks, including those related to the quality of the management of the sub-advisor and the ability of such management to develop and maintain a successful business enterprise, and the ability of the sub-advisor to successfully execute, operate, and manage the intended strategy at or below the target tracking error.

Business Risk
The fund’s strategy relies on key personnel, their expertise, relationships and networks. A loss of one or more key personnel may adversely impact the strategy.

The minimum investment in Ellevest Intentional Impact Portfolio is $250,000. In addition to Ellevest’s advisory fee, the client will pay 0.30% of assets managed to the sub-advisor.

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*About Ellevest Intentional Impact Portfolios

Ellevest’s Intentional Impact Strategy (the “Impact Strategy”) is a separately managed equity portfolio that is sub-advised by Ethic, Inc., (“Ethic”), an SEC-registered investment advisor. As sub-advisor, Ethic constructs and manages portfolios of individual stock positions benchmarked to an underlying index and customized to specific values criteria. The sub-advisor seeks to track the performance of a designated equity benchmark (domestic and / or international) while outperforming on impact across key sustainability criteria as defined by Ellevest and / or the client.

The Impact Strategy sustainability criteria are based on risks in the following categories: Ethics and Fraud, Greenhouse Gas Emissions, Exploitative Products, Product Quality and Safety, Working Conditions, Labor Relations, Workplace Diversity, Waste, Water, Human Rights and Community, War, Firearms, Low Employee Representation (gender), Low Management Representation (gender), Low Board Representation (gender).

Some of the key risks for the investing in Ellevest Intentional Impact Portfolio include:

Market Risk
As with all publicly traded securities, the Impact Strategy is exposed to market risk, the risk of losses arising from fluctuations in market prices caused by factors independent of a security’s particular underlying circumstances.

Active Risk
The Impact Strategy is expected to comprise around 300 US-listed equities (including ADRs as applicable) chosen through an outsourced multi-factor optimization software and sustainability data science developed by Ethic to minimize tracking error. This was developed to allow clients access to broad equity market exposure with the goal of keeping average tracking error low over the long term of less than for the Portfolios is under 1.50%.

Although the Impact Strategy is constructed to minimize tracking error relative to its benchmark, there is no assurance that the strategy will generate market returns within the estimated tracking error. Because the Impact Strategy is designed to capture investment returns associated with gender diversity, and high environmental and governance standards, the Impact Strategy may exclude, overweight, or underweight individual companies and/or sectors of the market. As a result, the Impact Strategy will not fully participate in the market returns of a general investment strategy. The Impact Strategy may over or under-perform a general market strategy.

Sub-Advisor Risk
The success of an account’s investment through sub-advisors is subject to a variety of risks, including those related to the quality of the management of the sub-advisor and the ability of such management to develop and maintain a successful business enterprise, and the ability of the sub-advisor to successfully execute, operate, and manage the intended strategy at or below the target tracking error.

Business Risk
The fund’s strategy relies on key personnel, their expertise, relationships and networks. A loss of one or more key personnel may adversely impact the strategy.

The minimum investment in Ellevest Intentional Impact Portfolio is $250,000. In addition to Ellevest’s advisory fee, the client will pay 0.25% of assets managed to the sub-advisor.

Emily Green

Emily joined Ellevest after seven years with JP Morgan, where she focused on the needs of high-net-worth families. Today, she’s a financial advisor on Ellevest’s Private Wealth Management team, working with clients to help them develop personalized long-term investment plans that align with their goals and values.