By Melissa Myers and Michael J. Tucker, December 2016 Issue.
Melissa Myers: People are asking more and more about sustainable investing.
Michael J. Tucker: Is that what we used to call Socially Responsible Investing?
Myers: That’s right. It’s also known as ESG Investing. That acronym stands for environment, social and governance.
Tucker: Has SRI changed over the years? What’s up with the name changes?
Myers: Actually, it has evolved considerably. Sustainable investing has been a growing trend for many years. Assets managed sustainably have grown to $6.6 trillion in 2014, from $2.1 trillion in 2003, according to the “Forum for Sustainable and Responsible Investment.”
Tucker: What has changed in the philosophy of sustainable investing?
Myers: As assets have grown, the approach has evolved. In the mid-1980s, socially responsible investing emerged and took an exclusionary approach.
Tucker: So the investment policy was “No guns. No alcohol. No tobacco.”
Myers: Exactly. But gradually, the focus changed to become more “what companies should do” as opposed to “what companies shouldn’t do.” Now, impact investing is focused on major initiatives such as climate change, gender equality, agricultural sustainability and the war on global poverty.
Tucker: So, it’s more than a gauge of simply how “green” a company is. It’s a broader measure of how well a company handles important environmental, social and governance challenges compared to other companies in similar industries.
Myers: Yes. Social factors could include a company’s labor standards or how it treats its employees.
Tucker: I suppose governance refers to issues such as how a company pays its executives or what kinds of political contributions it makes.
Myers: Right. Many investors are excited to be able to invest for their retirement or other financial goals in instruments that actually reflect their personal values.
Tucker: You mentioned the returns on this type of investing. How do the returns of a pooled investment of companies (mutual funds) that pass the sustainability standards stack up to other investments in similar industries?
Myers: Research on performance of sustainable investment strategies has found little evidence that this type of investing hurts performance. Most studies show either a neutral or positive effect. By looking at the sustainability of a company, you can identify companies that may offer competitive advantages in the long run.
Tucker: And on the other hand, you can avoid companies that present greater risk as a result of unsustainable choices.
Myers: It is now commonplace for global, well-known companies such as Coca-Cola, Apple, BMW and Adidas, to name a few, to consider sustainability in their corporate strategies.
Tucker: So this investing style has evolved from appealing mostly to “do-gooders” to investors who feel it makes good business sense as well.
Myers: Yes. The philosophy that “doing good leads to doing well” is in full force here.
Tucker: How would an interested investor pursue this in their portfolio?
Myers: Someone already working with a financial advisor could ask the advisor about their familiarity with the concept of sustainable investing. Some advisors make this investment style a focus of their practice. More often, an advisor will have tools to help their client choose from a growing variety of pooled investments (mutual funds) in this category.
Tucker: Many 401(k) providers will offer one or two investment options in the category.
Myers: It is important to diversify across many asset classes, so if only one or two sustainable investment options are offered in their 401(k) or other workplace retirement plans, investors should take into consideration that this may not provide adequate diversification.
Tucker: Investors should seek professional advice when considering this or any other type of investment.