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The goal of investing is more than just financial growth

Sustainable investing, an approach that integrates environmental, social and governance (ESG) criteria, is becoming a much sought-after strategy in the financial industry. Whether implemented through socially responsible investing (SRI) screening, ESG integration or impact investing, sustainable investing offers a growing number of options for investors interested in pursuing 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
    • 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.

  • What are the approaches?

    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

    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

  • Why should you consider it?

    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.

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