Socially conscious investors today have ramped up their expectations for investments that meet criteria for “sustainable” business practices and for transparent, positive contributions to society—and without sacrificing on return. Sounds like a tall order, but companies adhering to these principles are gathering an increasingly larger share of available global investment capital.
According to the Global Sustainable Investment Alliance, global assets managed under a socially responsible or sustainable investing approach were $22.9 trillion in 2016, up 25 percent since 2014. This figure represented 26 percent of all professionally managed assets. Europe comprised $12 trillion of that total, while U.S. assets stood at $8.7 trillion—representing almost 22 percent of U.S. managed assets and an increase of almost 33 percent since 2014.
So, what is a “sustainable” investment, and why is it important to potential investors?
Sustainable investing refers to an investment approach in which ESG (environmental, social and governance) factors are incorporated in the investment strategy. Other terms associated with this type of investing include impact investing, responsible investing, socially responsible investing, socially conscious investing, “green” investing and ethical investing. Each has its own nuanced meaning, which can vary according to the perspectives of the audience. Although the industry does not have agreed-upon standard definitions, these investing approaches generally share a common goal: to “do well” by “doing good.”
Investors interested in “doing well” on a return basis and “doing good” philanthropically are looking for a broad array of possible approaches that can be tailored to their priorities. They want to know their investments are being used in a manner consistent with their principles and beliefs. Some commonly listed sustainability factors incorporated into an investment strategy include:
- Environmental: carbon emissions, pollution and other waste, natural resource usage, energy efficiency, sustainability
- initiatives, community initiatives.
- Social: human rights, workforce safety and health, workforce diversity, opportunity equanimity, privacy and data security.
- Governance: board independence, board diversity, shareholder rights, executive compensation, ethics policies and history.
The roots of ESG investing extend back to the early 1970s with socially responsible investing (SRI). Traditional SRI is an exclusionary approach involving the screening of stocks to exclude companies operating in “sin” industries (such as gambling, alcohol, tobacco, nuclear weapons, etc.) from a portfolio. SRI can also include screening based on religious values and other institutional frameworks. Typically, individual investors can customize their SRI portfolios based on the specific industries they wish to avoid supporting.
At the beginning of last year, there were 234 mutual funds and ETFs that screened their companies for ESG/SRI factors (“pure play” ESG/SRI funds). Clearly, ESG investing is mainstream and here to stay.
At Commerce Trust, we believe that proper diversification is paramount to reducing risk and protecting capital over time. Your portfolio manager can play an integral role in helping you determine a prudent allocation suitable for you and building a diversified portfolio to help meet your goals. PM