Ethics and Global Concerns Driving Change
With the rise of the conscientious consumer and growing awareness about global warming, it’s no wonder that companies are pivoting toward higher sustainability. Aiming to increase sales by distinguishing their products to consumers, companies are finding sustainability an important factor. In fact, a majority of corporate executives now believe that a sustainable strategy is required to remain competitive. But the push for corporate sustainability is not only coming from consumers; investors play an integral part. Investor activism has increased significantly. Shareholder proposals forcing corporate sustainability have more than doubled in the last two decades. In 2017, 85 percent of the S&P 500 Index companies published sustainability reports, compared to under 20 percent as recent as 2011. The combination of activism by both consumer and investor is growing the size of sustainability. By extension, sustainable investing has witnessed fast growth; it is making up a much larger percentage of investment strategy despite current perception.
What Does This Mean to Investors?
The increase of publicly traded companies’ use of sustainability practices opens the universe to identifying sustainable companies; this type has been labeled, “sustainable investing.” Those that do or don’t practice sustainability can be identified via a continuum. For example, using a sustainability scale of 0 to 10, companies with low sustainability will rank closer to 0 while those with higher sustainability will rank closer to 10. The value of all U.S. publicly traded securities is approximately $70 trillion, consisting of $30 trillion and $40 trillion in the stock and bond market, respectively. A sustainability ranking can be applied to each security in the $70 trillion market, with each security ranging from very low to very high.
Investors may seek investments with higher sustainability for the sake of personal ethics; however, there are additional benefits to sustainable investing. Research has shown that companies with higher sustainability show higher return potential, profitability and dividend yield; they are valued at a premium when compared to their peers. Not to be outdone, there can be exceptional environmental benefits in addition to higher return potential. According to Nordea Bank, investing in sustainable companies can be 27 times more efficient in lowering a person’s carbon footprint.
Ways to Practice Sustainable Investing
Many investors look for professional investment managers rather than managing their own investments. Investors, through their 401k, 403b, IRA, pensions or other investment accounts, hire professional managers that identify investment opportunities. Professionally managed accounts focused on sustainability are now valued at $12 trillion. That is up 38 percent in just two years; the number has grown nearly four times over since 2010. Based on a total of $46.6 trillion in assets that are professionally managed, $1 in every $4 is invested sustainably.
A portfolio can become much more sustainable with research. Following are two popular methods of practicing sustainable investing using mutual funds or Exchange Traded Funds (ETF).
Sustainability indexing: pick funds that are more sustainable than their peer group
Ethical investing: choose funds based on investor’s ethics
Sustainability indexing creates options in an investment class. For example, many investors may hold an “index fund” that follows the market, like SPY, a MorningStar categorized large blend ETF. That same investor could pivot to DSI, a sustainably mandated ETF with the same category as the SPY. This same strategy could work for many other investments in a portfolio.
Rather than using sustainability indexing, an investor may want to invest with more specificity using an ethical investment strategy. This practice involves an investor actively eliminating ETFs based on their ethics. An investor may want to focus investments based on environment, health, human rights and other criteria. This can be better explained through examples where the funds below represent certain ethics-based ETFs.
SHE – SPDR SSGA Gender Diversity: companies with high diversity/inclusion
ICLN – iShares Global Clean Energy: clean energy companies
CGW – Invesco S&P Global Water: water-conscious companies
VETS – Pacer Military Times Best Employers: companies that are known to hire military veterans
ESML – iShares MSCI USA Sml-Cp ESG Optmzd ETF: an ETF that is gun-free
Who’s Doing It?
The United Nations created the Principals of Responsible Investing (UNPRI) for investors to adopt by becoming signatories. UNPRI distinguishes its over 2200 signatories into three types: asset owners, investment managers and service providers. Some asset owners who are signatories include The City of Chicago, Employees’ Retirement System of the State of Hawaii, Harvard University Endowment, and Connecticut Retirement Plans and Trust Funds, to name a few. These signatories promise to incorporate sustainability into their investment positions.
Have no fear, when thinking about an investment portfolio through a 401k, 403b, IRA or others, the investment managers that are listed in the UNPRI include household names. These investment managers manage numerous retirement accounts and have numerous sustainability products that may fit an investor’s portfolio. Here are some of the most recognizable investment managers: Fidelity, BlackRock, Vanguard, State Street and Nuveen (via TIAA). Investors may find products—mutual funds or ETFs—at these institutions that meet their sustainable investing needs.
Investors should do their research. Pay attention to the holdings in diversified sustainable mutual funds and ETFs because it’s possible that some of the holdings within a sustainable fund may go against an investor’s personal ethics. Furthermore, investing comes with risks. When investing, consideration must be given to one’s budget, risk tolerances, return objectives, life changes, liquidity needs, investment horizon and many other factors. Working with an advisor/planner can help. The right advisor will talk to the client, listen to the client’s needs, goals and wishes. They will educate the client about investment products that may be appropriate for the client’s investment and sustainability goals.
James N. Osborn Jr. is the founder and principal of Envest Asset Management, LLC, a firm that provides financial planning and investment management to individuals, families, businesses and nonprofits focused on sustainable investments. Connect at James.Osborn@EnvestAM.com and EnvestAM.com.
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