Positive impact investing is a popular term these days and has become synonymous with investing in companies that do something “good.” This is understandable, but in our view unfortunate. Why? Because it opens the door to investment decisions that are built on the simplistic fallacy that companies that make something ‘good’ should also be good investments.

Themed funds are one example. They benefit from simple concepts, such as solving the world’s water problems or harnessing the power of the wind or the sun. These ideas sound good, look good and feel good, but are they any good? Often not, for a few very simple reasons.

First, these funds may not do what they say they do. The idea of a water fund, for example, can be very different from the reality of the companies they actually invest in. This could well be a manufacturer of expensive taps for luxury homes (not exactly helping to “solve” a water crisis) or a pump manufacturer that is 90% exposed to the oil and gas industry.

Second, thematic funds have far fewer investment options and so can be left backing the losers as well as the winners. Over time, returns between each stock within any theme will vary widely depending on stock specifics. That’s no good if you hold them all.

Third, the lack of options within any particular theme can lead managers to shoehorn ideas into their funds that are either poor investments or questionable in terms of thematic exposure (thereby diluting their exposure to the actual theme).

Fourth, there’s the law of unintended consequences. Thematic funds sometimes deliver unintended factor risks that can overwhelm stock-specific risks and contradict the intended theme.

We believe that sustainable investing can offer clients a positive impact with their capital, while also potentially outperforming the market. We analyze the positive and negative impacts of potential investments using three dimensions of sustainability: products, practices and improvements. Gaining meaningful insights necessitates that we think through second and third-order impacts in an effort to identify differentiated, sustainable, growth investments for our clients.

But here’s the thing: We don’t need to invest in wind turbine, solar panel, water pump or electric vehicle manufacturers to achieve a positive impact. Indeed, poor business models, weak industry dynamics or excessive valuations often prevent us from doing so.

Yet this does not mean that we aren’t committed to delivering a positive impact with our clients’ capital. We seek to uncover unappreciated gems with positive impacts even if this is not obvious at first glance. Sometimes this is through their practices (how they operate), but more often it’s through the more meaningful second-order impacts of their products. The challenge (and the opportunity) is that it takes diligent bottom-up research to find them.

Read more at Think Advisor