Sustainable Investing

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.

Exclusionary screening:

  • 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

Integration:

  • 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

Impact investing2

  • 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