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.

Objectives:

• Encourage positive environmental, social or governance practices
• Align investments with personal values
• Potentially improve portfolio risk/return characteristics

 
Desired Outcomes:
Whereas conventional investing is focused on risk/return, and philanthropy seeks solely to benefit charities and causes without return or income consideration, sustainable investing looks to accomplish both in varying degrees along a spectrum of possible outcomes.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

While there is a common theme of pursuing a greater purpose, there is much variety within sustainable investment strategies, particularly in how they are implemented. Implementation generally takes the form of one or more of the following approaches:

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 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
• Ranges from grant support to private equity; liquidity risk and return target can vary dramatically
• 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

Other dimensions

• Thematic investing – focuses on a specific ESG theme, and structures a portfolio around companies or industries that support that theme
• Shareholder engagement (activism) – actively engages with a company, directly working with management or exercising shareholder rights to effect change

¹ CFA Institute, “ESG Issues in Investing: Investors Debunk the Myths.” 2015
² Global Impact Investing Network, “What You Need to Know About Impact Investing,” https://thegiin.org/impact-investing/need-to-know/#s2

The paths to pursuing effective global stewardship and possible growth are coming together in the investor mindset. 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.

Investors may consider sustainable investing for a host 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.
• 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.