Sustainable Investing is More than Financial Growth

Investment Strategy

Sustainable Investing is More than Financial Growth

Sustainable investing, an approach that integrates environmental, social and governance (ESG) criteria, is becoming a much sought-after strategy for investors.

September 7, 2016

Whether implemented through socially responsible investing (SRI) screening, ESG integration or impact investing, sustainable investing offers a growing number of options for people interested in achieving goals beyond financial growth when building their portfolios.

What is It?

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
  • Improve portfolio risk/return characteristics

What Are the Approaches?

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.

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 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

1CFA Institute, “ESG Issues in Investing: Investors Debunk the Myths.” 2015

Impact Investing

  • 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

Global Impact Investing Network, “What You Need to Know About Impact Investing,” https://thegiin.org/impact-investing/need-to-know/#s2

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

There are many considerations when it comes to sustainable investing, so work with your financial advisor to find the approach that works best for you.



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