There are a number of terms used for Sustainable Investing. How are they different?
There’s no question: the four terms which have been used interchangeably for Sustainable Investing warrant clarification:
- Socially Responsible Investing (SRI)
- Impact Investing
- ESG Investing (Environmental-Social-Governance)
- Sustainable Investing
Socially Responsible Investing (SRI) was the original label established decades ago and was a well-intentioned process focused on investing in companies that were intending to do good in the world. It accomplished what was possible with little data at the time, but was largely founded on idealism and hope, and perhaps was short on pragmatism (focusing on returns).
Impact Investing typically refers to the work of big money investing entities (ie. venture capital, family offices) that are funding specific companies or industries to make a 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 to 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 SRI-Impact-ESG-Sustainable mass consciousness. For me, “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?!
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.
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 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).
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, if you will, that my expertise in Sustainable/ESG is frosting on the cake. I provide holistic, fee-based financial planning, investment advice, insurance guidance (life, disability, long-term care), and financial business consulting, with Sustainable/ESG Investing layered on top. I also work with select clients (people and enterprises), who are both a good fit for our firm and with me as an advisor, who may not be inclined towards a Sustainable/ESG focus. That is their personal choice; I’m simply here to help people. 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.