Does Sustainable Investing require accepting lower returns?
This is a myth. Performance tracking against benchmarks suggests that investors who are in alignment with their values and beliefs are now achieving competitive or better returns than traditional (depending on the specific investment). Keep in mind that ESG data is now available on every large cap stock on the planet and the majority of mid caps. As a result, many of the world’s high profile companies have high ESG scores. Furthermore the “G” in ESG stands for Governance. Corporations with outstanding governance are typically good investments. There’s also some level of risk mitigation due to the increasing demand for Sustainable/ESG investments, creating what appears to be a wider moat for higher ESG-rated equities.
What funds and companies can I invest in?
The bigger question is what do you want to invest in? Do you want to be in a multitude of companies that are generally good corporate citizens and do little to no harm, or do you have specific values and beliefs that you want be aligned with? Most people fall somewhere in the middle. There are now hundreds of ESG-focused mutual funds and ETFs (and bond funds) with approaches ranging from broad to niche. Some niche areas are environmental leadership, gender equality, sustainable energy, water supply, as well as large cap, mid cap, small cap, international ESG, etc. One investment firm is doing automated custom ESG portfolio creation, while another provides custom ESG indexing (ie. taking the S&P 500 and removing unwanted types of companies for the individual investor).
There are a number of terms used for Sustainable Investing. How are they different?
Four terms have often been used interchangeably for Sustainable Investing and warrant clarification:
- Socially Responsible Investing (SRI)
- Impact Investing
- ESG Investing (Environmental-Social-Governance)
- Sustainable Investing
Socially Responsible Investing (SRI) is a term still used today (anachronistically in my view) and was the original label established decades ago for a well-intentioned movement focused on investing in companies that intended to do good in the world. Largely founded on idealism, while perhaps short on pragmatism (returns focus), it accomplished what was possible with little data at the time.
Impact Investing typically refers to the work of large investing entities (ie. venture capital, family offices) that are funding specific companies or industries to make a large positive impact on the planet and leave an enduring legacy. This term is often used, incorrectly in my opinion, for the entire Sustainable Investing space.
ESG Investing (Environmental-Social-Governance) is a misnomer for the entire space, according to some. They believe that the ESG acronym should only refer to the data collected by Sustainalytics and other firms that create Environmental-Social-Governance scoring for equities. That said, many people use ESG as a label for the field, which is understandable given the importance of the data and the descriptive nature of the term.
Lastly, Sustainable Investing is a broad and accepted term that currently resonates with the mass consciousness. I view “Sustainable” as a double entendre: is a corporation enacting policies and taking action that contributes to the sustainability of humanity and planet earth, and are these initiatives also leading to the company’s sustainability as an enterprise and investment?!
For my own use, I hedge by using the term Sustainable/ESG Investing. “Sustainable” is the most accessible term, yet the Environmental-Social-Governance data system is instructive and helpful in explaining the modern criteria to investors.
What percentage of investable assets in Sustainable/ESG is too much?
That’s a personal decision for individual investors, which we can help with. You can have a well-diversified portfolio that’s 100% in high ESG-rated assets, but it’s common to start with some percentage that feels comfortable. It largely depends on your specific values and goals, after assessing the options.
As a financial/investment advisor, is Sustainable/ESG Investing your sole focus?
Imagine my expertise in Sustainable/ESG to be frosting on the cake. The foundation of this multifaceted investment and advisory practice is my service to clients as a fiduciary advocate in every facet of modern asset management and financial planning, with Sustainable/ESG Investing layered on top, including integration into 401(k) and other retirement plans. I also work with clients (people and enterprises) who may not be inclined towards a Sustainable/ESG focus. Nevertheless, I have a strong desire to do good in the world and my passion for the Sustainable/ESG space is an exciting way to help like-minded clients do the same.