Sustainable investing offers a growing number of options for investors interested in achieving goals beyond financial growth when building their portfolios. Through sustainable investing, not only can investors aim to make a positive impact on society and the environment, they can potentially improve the risk/return characteristics of their portfolios by factoring environmental, social and governance (ESG) criteria into their investment decisions*.
Why Consider It?
Investors may want to consider sustainable investing for a variety of reasons:
- Risk Mitigation: Companies that ignore their social and environmental impacts may face regulatory and governance risks.
- More conscious approach to investing: Investors may aim for a positive impact or avoid ties to questionable activities and governance risks.
- Long-term performance: Companies with a negative reputation or poor business practices may not be sustainable.
- Align investing with personal or religious views: Investors may not feel comfortable investing in companies whose business practices they view as morally objectionable.
- Fiduciary duty: Professional asset managers have a responsibility to invest within certain standards that represent their clients’ interests, which would likely make investments in companies with unsustainable practices less appropriate.
Sustainable investing, when incorporated into a well-defined, long-term investment plan, can be a powerful tool in addressing global challenges while achieving personal financial goals.
What Are the Approaches?
While there is a common theme of pursuing a greater purpose, there are several approaches to sustainable investment strategies.
- Viewed as the original approach to “responsible” investing
- Also known as socially responsible investing or negative screening
- Excludes individual companies or entire industries from portfolios if their activities conflict with an investor’s values, such as fossil-fuels, gambling or alcohol
- Limits investable universe, which could impact diversification
- Combines ESG criteria with traditional financial considerations
- Gaining momentum as portfolio managers consider ESG themes in their decision-making process
- Sometimes implemented as a best-in-class approach by identifying and investing in companies that are the best ESG performers within a sector or industry group
- A study conducted by the CFA Institute cites integration is the most commonly used method1
- Aims to have a social or environmental impact alongside financial return, with a focus on intentionality and measurement of impact
- Most common products are funds invested in private equity and venture capital
- Accredited investors and funds are the leaders in impact investment by asset level
1CFA Institute, “ESG Issues in Investing: Investors Debunk the Myths.” 2015
2Global Impact Investing Network, “What You Need to Know About Impact Investing,” https://thegiin.org/impact-investing/need-to-know/#s2
*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.