When it comes to growing your money, sometimes what you do or do not invest in matters as much as how well your investment performs. It’s not just about risk, it’s about personal values. In this modern era, we have the unique opportunity to not only feel good about our portfolio returns, but also what we invested in and how we achieved those returns.
That is precisely why sustainable investing is gaining popularity as investors increasingly seek to align their investments with their personal values and seek to work with financial professionals who not only understand them as an investor, but also as a value-driven individual.
One way to accomplish this goal is to use an investment approach that focuses on environmental, social, and governance (ESG) criteria. An ESG lens may consider issues such as climate change, pollution control, gender equality and diversity, human rights, or corporate board composition.
ESG aware investing pursues opportunities by managing risks associated with corporate actions, policies, and trends related to things like sustainable business and environmental impact, societal and community contributions, DI&E practices, and the demonstration of sound corporate governance.
Since the 1960s, sustainable investment strategies have shifted from an exclusionary approach to an inclusionary one. Over time, this shift has broadened the supply of investment offerings to meet demand. Interest in sustainable investing began to accelerate in the 2000s.
According to a recent study, assets in these types of investments grew by an estimated 38% from 2016 to 2018 in the U.S., rising from $8.7 trillion in 2016 to $12 trillion in 2018. Globally, sustainable investments total $23 trillion, which represents 26% of all professionally managed assets. This has increased from 21.5% of professionally managed assets just four years ago. Investor demand has been a key driver behind this increase.
A common misconception is that sustainable investing—including ESG-driven strategies—imposes hurdles on performance. After all, aren’t most companies more motivated by profits than they are values? You be surprised to find out reality is quite the contrary.
Thankfully, you do not need to throw ethics and values out the window to achieve good returns. Studies of longer-term historical performance suggest that ESG strategies have performed similarly to comparable traditional investments on an absolute basis and a risk-adjusted basis. Sustainable investment strategies do come with risks, like any investment.
Another misconception is that demand is being driven mainly by younger investors. Yet, research suggests that investors across generations are interested in sustainable investing.
While Millennials are apt to discuss sustainable investing with their financial advisors, other generational cohorts also have expressed interest as well.
A 2020 Wells Fargo/Gallup survey found that 82% of surveyed investors showed interest in choosing investments based on the environment, human rights, diversity, and other social issues—if those investments provided returns similar to the market average.
One interesting case in point: Thompson Reuters, under the corporate brand Refinitiv, created an index to transparently and objectively measure the relative performance of companies against factors that define diverse and inclusive workplaces.
The index ranks more than 7,000 companies globally and identifies the top 100 publicly traded companies with the most diverse and inclusive workplaces, as measured by 24 metrics across four key pillars: diversity, inclusion, people development, and news and controversies.
Not only have these companies scored well, but the index has outperformed the Thompson Reuters Global Total Return benchmark, demonstrating that diversity and inclusion can also lead to profitability. Perhaps values really can drive growth!
Industry professionals predict that sustainable investment choices available for investors will continue to expand. In fact, some analysts predict that ESG factors could become a normal consideration of most investment strategies, particularly those intended for younger investors who tend to expect greater transparency from their investments.
In fact, it may surprise you to know that today, sustainable investing accounts for about $1 out of every $4 under professional management in the U.S.
If you are new to socially responsible investing, or perhaps investing in general, a good idea is to seek an advisor with expertise in SRI and ESG investing.
While most advisors remain investment agnostic, acknowledging that both an S&P 500 index fund or a Socially Responsible green fund can accomplish your objectives if that’s what fits best, some practitioners specialize more in this area.
Advisors seeking attractive and support consumers with values investing interest may perform rigorous invest selection and screening process that not only support optimal performance but also measure the societal and environmental impact of the firms themselves.
You may want to find and advisor that’s confident about utilizing traditional vehicles, but passionate about finding less common ways to accomplish your goals, especially if doing so better aligns with your personal beliefs.
The right advisor’s role should be simple: to understand not just where you want to go, but who you are and what values you have so that he/she can examine all of the right options that can fit and empower you to move forward.
Brian Haney, CLTC, CFS, CFBS, CIS, LACP is Certified Income Specialist and avid supporter of sustainable investing. His book “The Retirement Income Pyramid” is great guide to creating a solid income in retirement. Brian Haney is a Registered Representative of Coastal Equities, Inc. and an Investment Advisory Representative of Coastal Investment Advisors, Inc. Neither Coastal Equities, Inc. nor Coastal Investment Advisors, Inc. is affiliated with The Haney Company, P. Allen Haney, or Scott Haney. Advisory Services are offered through Coastal Investment Advisors, Inc., a US SEC Registered Investment Advisor, and securities are offered through Coastal Equities, Inc., Member FINRA/SIPC, 1201 N. Orange St., Suite 729, Wilmington, DE 19801.You can contact him at: email@example.com or online at www.thehaneycompany.com