Sustainable investing is an investing philosophy that incorporates environmental, social, and corporate governance (ESG) considerations into the process of selecting investments. Proponents of sustainable investing believe that directing capital toward companies that are dealing effectively with sustainability issues will enhance the transition to a more sustainable global economy. Companies need access to capital to flourish. This capital is provided by individual and institutional investors. The sustainable investor chooses to invest in companies they believe are working toward the goal of a sustainable global economy.
Sustainable investing has grown from investor demand for choices that align with their personal values. Similar concepts with different names include socially responsible investing, impact investing, and faith-based investing, just to name a few. These strategies started as a niche but have become relatively mainstream. The 2014 Nielsen Global Survey of Corporate Social Responsibility found that more than half of people are willing to pay more for products and services from companies committed to positive social and environmental impact. A 2017 Morgan Stanley study showed that 71% are interested in sustainable investing.
Part of the growing interest in sustainable investing and ESG has little to do with morality -- failure to manage environmental risks, lawsuits related to discrimination, fines and prosecution related to financial misdeeds and negligence, for instance, can all hurt companies' bottom lines. Furthermore, there is now plenty of research to suggest that sustainable investing strategies perform just as well as strategies that do not consider ESG factors. Investment companies take ESG seriously and play an active role in promoting ESG considerations to corporate management. In 2011, only 20% of the top companies reported on sustainability; by 2015 that figured increased to 83%.
There are many ways to craft a “sustainable” portfolio. Exclusionary screening can be used to single out companies who deal in specific businesses like fossil fuels, firearms, alcohol, and tobacco, for example. Alternatively, a more bottom-up “inclusionary” focus may be used to select companies that are considered to be leaders in sustainability. With this approach, for example, an environmentally concerned investor may choose to include certain fossil fuel companies who are considered “best in class” in regards to ESG issues.
Those interested in sustainable investing need to ask themselves at least a few things;
- How much are you restricting your investment universe by limiting exposure to certain sectors of the market?
- Are you too concentrated in volatile market sectors?
- How correlated are you to the broader market?
Additionally, there is a lack of uniformity in benchmarking ESG factors. Sustainability is largely in the eye of the beholder. A closer look at some financial products labeled “sustainable” may in fact not match an investors personal values. Even “sustainable” companies are prone to ESG deficiencies and undisclosed issues. If an investor wants to do more than pay lip service to ESG issues in their portfolio, it will take some work.
If you have any questions about sustainable investing, please contact us. While implementing a sustainable portfolio can be challenging, it doesn’t have to be expensive & time consuming when you work with us.
A few good online resources:
Morningstar https://www.morningstar.com/company/sustainability
State Street Global http://www.statestreet.com/ideas/articles/benchmarking-esg.html
The Forum for Sustainable & Responsible Investment https://www.ussif.org/
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