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Sustainable Investing: What the Buzz is About
What it is, why it’s growing and three ways you can align your investments with your values
Stroll any grocery store and you’ll find goods that signal their sustainability, from fair-trade chocolate to organic coffee. That same wave of sustainability is becoming commonplace in investing, too, with a variety of portfolios to choose from under many different names.
Let’s sort through some of the motivations for this method of investing, and how each one stacks neatly into one of three main sustainable investing strategies.
Speak Sustainability - Key Terms
ESG integration: Combining environmental, social and governance criteria with traditional financial considerations. It is sometimes implemented as a strategic approach by identifying and investing in companies that are the highest ESG performers within a sector or industry group.
Exclusionary screening: Excluding certain sectors or companies if they conflict with an investor’s values. Also known as negative screening or socially responsible investing.
Impact investing: Investing with the intention of generating social or environmental impact alongside a financial return. The exact impact can vary based on the investor’s goals.
Sustainable investing: An umbrella term that includes all of the strategies described above.
Balancing Growth and Values
If you want to invest in companies that are trying to make the world a better place, and want competitive returns, look into ESG. Investments with an ESG integration approach consider environmental, social and governance data alongside traditional risk and return metrics. The ESG data may include how well a company is managing environmental factors like pollution and energy efficiency, social factors like data security and labor standards, and governance factors like board diversity and business ethics.
The idea is to create a portfolio weighted toward companies with leaders who are skilled at managing these issues, which in turn may lessen financial risks such as fines and reputational damage. The ESG data is integrated into the investment process.
The ABCs of ESG
Climate change, carbon emissions
Air and water pollution
Green products, technologies and infrastructure
Employee engagement, pay and development
Diversity and inclusion
Data protection and privacy
Audit committee structure
Bribery and corruption
Do well-governed companies with high ESG ratings actually give investors an advantage? An analysis by Morningstar showed sustainable funds in the U.S. outperformed the broader market during a market correction in February 2018, and an analysis of 2,200 studies published in the Journal of Sustainable Finance & Investment showed material ESG factors had a positive or neutral impact on stock performance. It’s little wonder that this approach is gaining popularity as the data gets more sophisticated – and more compelling.
Sustainable mutual funds and ETFs available to U.S. investors scooped up $20.6 billion of total new assets in 2019, data provider Morningstar reported, four times the $5.5 billion captured in 2018. In the U.S., sustainable investing of all types has reached $12 trillion, up 36% since 2016, according to the US SIF Forum for Sustainable and Responsible Investment.
If you want to avoid investments that don’t align with your values or standards, you’re likely a fit for an exclusionary or “negative” screening approach to sustainable investing. This “do no harm” strategy traces back to Quakers in the 18th century who refused to invest in the slave trade, and was later seen when U.S. investors moved money out of South African apartheid-supporting businesses. Today, investors may choose to avoid tobacco producers, natural resource extractors, or major companies that lack diverse leadership.
Exclusionary screening is the most popular sustainable investing approach globally, according to the 2018 Global Sustainable Investment Review, though ESG integration follows closely behind.
If you want to use your money to create a measurable positive difference in the world alongside a financial return, impact investing might be for you. Of all the available strategies, this one most often consists of direct investment in private companies targeting big world problems. To achieve change, many foundations and family offices are establishing funds supporting local economic development and social impact missions across the globe.
Impact investing ranges from grant support to private equity, with liquidity risk and return potential varying dramatically. Though the space is newly evolving, impact assets are estimated at $228 billion, according to Global Impact Investors Network estimates, almost double that of 2017. This method of investing is especially appealing to younger generations, and shifts in wealth will likely lead to further growth.
Helping you invest in the future you want to see
If you are seeking new ways to live your values, we can help you sort through the options to find the sustainable investments that fit your life and the unique impact you want to make.
Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria. Investors should consult their investment professional prior to making an investment decision.