How Does an Investor Actually Make an Environmental Impact?

Kevin Karpuk, CIO, Cornerstone Advisors Asset Management, LLC

Historically, the fiduciary duty of investors was to maximize profits and returns on investments. Until the mid-2000s, any benefit to other stakeholders like employees, the public or special interest groups was secondary.

The decision-making process has since changed with more investors seeking to align their portfolios with their beliefs, putting the maximization of profits either on par with or secondary to this new priority. Environment, Social & Governance (ESG) has also increased in popularity, becoming nearly synonymous with terms like sustainable investing.

Unfortunately, there are key differences in how ESG and sustainable investments are scored, and many investors may find their portfolios are not as aligned with their social and environmental goals as they may have thought.

It’s important to understand ESG is not an investment strategy. Rather, it’s a way for investors to consider metrics that aren’t tied directly to an income statement or balance sheet. ESG is a broad term that doesn’t fully capture a company’s commitment to specific issues and causes.

For example, a company with a high ESG score may be investing a huge amount of time and money in supporting positive environmental goals, like renewable energy, and not much time on fighting social inequality within their workforce. Unfortunately, some companies may not report all relevant information for ESG scoring. This leaves scoring firms to make assumptions, however, many investors find it easy to define exclusionary restrictions and monitor adherence to that policy.

Sustainable investing, on the other hand, is what many investors and managers mean when they refer to an ESG mandate. Sustainable investing is a strategy in which investors believe companies that set and meet sustainable investing metrics may perform best in future periods. These are companies that are investing in sustainable initiatives to enhance their survival and future success. As an example, short-term profit maximization at the expense of labor, the environment or developing governance strategies is not a sustainable strategy and would not be the target of a sustainable investor.

When investors are looking to make a positive environmental impact, it is important to consider ESG scores, understand them, and take those findings to develop a sustainable investment strategy. Investors can do that through a series of mechanisms.

Thematic Investments

When working with an investment manager, investors should identify the themes and areas they want to invest in. For instance, an investor can express interest in investing in a green energy fund, an ETF (Exchange Traded Fund) whose holdings all have diverse boards of directors or private equity funds that focus on companies that pay employees a fair wage. These themes can be as specific as renewable energy, or broader topics like reduced inequality.

Negative Screening

Perhaps the most straightforward and easy-to-implement concept for conscientious investing is simply to screen out the industries an investor may not want to invest in, like firearms, fossil fuels or tobacco. An investor may choose to screen out an industry or company due to high-tier perceptions. This could include not investing in practices that the investor finds run counter to their personal beliefs or personal experiences from interacting with a brand or industry with which the investor has a negative perception or experience. There are no limitations on the number of exclusions an investor can impose on an investment manager.

Impact Investments Investments that target institutions and corporations making a positive impact on society would fall under the impact investment category. An investor focused on impact investments will focus on community development financial institutions or equity investments in companies that promote some area of collective or community good the investor wants as part of his or her portfolio. Large corporations are typically not considered part of the impact universe.

These investment strategies will not necessarily offer the highest returns, although some may. What investors need to understand is these strategies will create deviations from those traditional benchmarks that can either help or detract from relative performance over extended periods. For investors to ensure their investments are making an impact, it will be important to understand how the various metrics and funds work together so they may better tailor their portfolio to align with their goals and values.

Looking ahead, ESG scores and sustainable investing are expected to increase in popularity, especially as investors gain access to more focused and specific information as it relates to an investment’s impact on values and causes that investors believe in. As additional tools and information emerge, it will be natural to assume that ESG-focused investing will only continue to evolve.

Kevin Karpuk is Chief Investment Officer at Cornerstone Advisors Asset Management, LLC. Kevin joined the company in 2000 after graduating from Lehigh University with a B.S. and M.S. in Economics and earned his CFA charter in 2005. Kevin supports many charitable causes and has established a donor-advised fund to propagate his philanthropic interests.

The return of house hacking

History is replete with stories of heroes setting out to search for nearly unattainable objects that will grant the finder a great reward.

Jason and his Argonauts sought the golden fleece, King Arthur and his Knights of the Round Table the Holy Grail, Ahab had his white whale, even Fox Mulder and his search for the elusive “truth” that was allegedly “out there”.

For the past few years real estate investors have searched, largely in vain, for affordable two-to-four unit buildings to do what is called house hacking. The object is to find a small multi-unit building, live in one unit and rent the others out. When done properly you can live rent/mortgage payment free, or even make money every month.  It is touted by many as the ideal entry point to real estate investing and therefore step one in building a portfolio of rental properties.

What makes house hacking so attractive to owner-occupant buyers is the ease and number of options for favorable financing. Banks have two main categories of loans: owner-occupied and investment properties. Banks treat multi-unit buildings with an owner living in one of the units much more like an owner-occupied loan than an investment loan.

Because owner-occupied mortgages have a significantly lower rate of default, banks can have down payment requirements as low as 3.5% to 5%, and the interest rates offered are the lowest there are.

Where it gets difficult

When you move to more than four units, the lending laws change. Lenders treat properties with more than four units as commercial whether the owner lives on site or not. This eliminates many of these potential benefits.

The challenge has been too many searchers and too little available inventory. So, even though many blogs, gurus, and coaches teach people to set out on this crusade, precious few attain their goal.

The Central PA real estate market has recovered from the last dip brought on by the financial markets crash of 2008. As prices went up, investing in real estate became an attractive option again.

In the hot real estate market we have been experiencing, two- to four-unit buildings have been gobbled up by seasoned investors. This has pushed up their value to the point where they don’t make sense for house hackers, or limited the available options to undesirable locations for most middle class investors looking to occupy as an owner.

A turn for the better

All this is about to change. The troubles in the economy are going to spark investors needing to liquidate some of their current holdings to raise capital so they can weather the storm

Some of the properties they will be selling will make ideal candidates for house hacking. It is also very likely that seasoned investors and full time landlords that have been absorbing any two- to four-unit properties coming on the market will slow down or even pause their buying activity. These old salts have enough on their plate with eviction delays and bills to pay, that it is likely they won’t be looking to add to the portfolio they own.

More opportunities are out there, or will be soon, than have been in recent memory. Your aim should be to prepare and be ready for them. If you are not ready, you should focus on two major relationships: a lender who knows investment loans, and a trusted Realtor experienced in the rental market.

Are you working with a realtor sending you multi-unit properties in your price range in your targeted school districts? Are you talking to a lender that has given you an approval in the last 30 days? (Now is not the time to waste anyone’s time with a pre-approval, much a pre-qualification) If you can’t answer an emphatic yes to both questions, and you have been telling yourself you want to invest, you have your homework.

With great mortgage options, and a very likely increase in inventories, now is the time for the return of the house hacker! If you have looked to take advantage of this strategy in the past only to give up, this could very well be your chance to jump in the lucrative world of investment real estate.

When the opportunity presents itself you need to be ready to strike. It will still be hard, you will still likely be competing against other investors.

Lending guidelines have tightened some even as rates have gone down. The point is not that it is difficult, but that is for the first time in years attainable.  Who knows how long this window of opportunity will be open, don’t miss it.


Judah Hoover is the vice president of business development for SlateHouse Group Property Management in Harrisburg. Hoover bought his first rental property when he was 22 and for the past 20 years, has been a full time investor and full time servicer of the real estate community. Hoover lives in Lancaster County with his four children where he enjoys serving at his church, good wine with friends and skydiving.