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What is Sustainable Investing?

What is Sustainable Investing?

January 12, 2021
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In everyday life, you seek to live in a way that adheres to your own personal and social values, so why shouldn’t your investment strategy follow the same rules? The rise of sustainable investing is offering more choices for investors who want to align their money with their values.

Sustainable Investing refers to any investment strategy which seeks to consider both financial return and social / environmental good. Sustainable investing is actually an umbrella term for three distinct strategies: Socially Responsible Investing (SRI), Environmental, Social, and Governance (ESG) investing, and Impact Investing.

Socially Responsible Investing (SRI) typically seeks to avoid companies in particular “vice” industries such as tobacco, weapons, fossil fuels, gambling, etc. There is also a subset of SRI called Values Investing, which seeks to align investment choices with the values of the investor, such as human rights, climate changes policies, corporate diversity, animal testing, or faith-based ideals. There can be dramatic differences between mutual funds that consider themselves to be SRI as there is no widely recognized definition of socially responsible, and it’s up to each fund as to how they define it. Reading a fund’s prospectus will help you understand how the fund is invested and its objectives and values, as well as the associated fees, expenses, and liquidity options.

Environment, Social and Governance (ESG) investing pursues explicit inclusion of ESG factors in choosing companies in which to invest. It seeks to minimize the negative environmental, social, and governance factors and increase exposure to companies that explicitly seek to be better from an ESG perspective. Environmental factors measure how a company treats natural resources. Social standards evaluate how a company treats its employees and community. Corporate governance refers to issues such as gender equality, community outreach, and actively working to be a good corporate citizen. The more a company prioritizes these three criteria, the higher its ESG rating. ESG rating is determined based on research and the company’s rating on a scale “AAA to CCC” according to their exposure to industry specific ESG risks, and their ability to manage those risks relative to peers. Morningstar now has a scale to rate mutual funds from an ESG perspective. The better the score, the more Globes awarded.

Impact Investing seeks to invest only in companies that have an active, positive impact on society and may have a very specific goal in mind such as renewable power or ending disease. This strategy is only appropriate for a small portion of an investor’s assets as the lack of diversification can carry increased risks.

The growing interest in sustainable investing is creating a wealth of new investment options that allow people to be more socially conscious with their investment strategy without sacrificing returns. In the past, choosing to be socially responsible often meant a lower rate of return than a non-ESG portfolio, but recent studies have shown that this may no longer be the case. According to research from Nuveen investments, companies that make the effort to manage ESG risk and opportunities may also improve financial measures and potentially enhance stock performance. As with any investment portfolio, it is important to remain properly diversified by holding a wide array of asset classes.

Developing a sustainable portfolio is not without its challenges. Selecting appropriate investments can be more challenging due to differing standards and terminology involved in sustainable investing as well as inconsistent rating criteria. Building an investment strategy that incorporates an ESG mandate often takes a significant amount of research and modeling.

The EBW investment committee is rolling out new portfolio models with an ESG mandate. Our goal is to reduce exposure to companies with confirmed violations in environmental, social, and governance standards in these select models.

Sustainable investing may not be for everyone. Consider the risks, fees, expenses, and liquidity options before making any investment decisions. Talk to your advisor if you would like more information about sustainable investing.

ESG investing involves the exclusion of certain securities for nonfinancial reasons.  This may result in the investor forgoing some market opportunities that may have been available to those not subject to such criteria.  There is no guarantee that any investment goal will be met. 

Investors should consider the investment objectives, risks and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money.

 

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