Sustainable investing—a common catchall term for socially responsible (SRI), environmental, social, and governance (ESG), and impact investing—has become sufficiently mainstream so it isn’t a great idea for an investment advisor to say, “We don’t do that,” said Jon Hale, head of sustainability research for Morningstar Investment Management. “Conversely, advisors who make it a specialty will be gaining a valuable differentiator.”
To help advisors learn about what can appear to be a daunting topic, Hale presented four keys for sustainable investing success at IMCA’s 2017 Investment Advisor Forum.
According to Hale, the first key is to understand of why it’s important to be conversant on the topic: limited natural resources, climate change, and the impacts of globalization. “All of these issues are driving home the importance of sustainability. Widespread appreciation for this can be seen simply in the proliferation of environmentally sound and socially conscious products, from hybrid cars to organic cereal,” noted Hale.
Sustainable investing itself has evolved from SRI—investors choosing to screen out certain undesirable companies or practices from their portfolios—to ESG investing— choosing portfolios of investments based on their constituents being best in class for performance on ESG issues. Impact investing, the practice of seeking measurable environmental and social impacts along with investment returns, has evolved from the same roots.
Evidence of how big sustainability has become can be seen in the exponential increase in assets under management (AUM). AUM has risen from $639 billion in 1995 to $8.7 trillion in 2016, with growth more than doubling in the past four years alone.
At the same time, 1,600 investment managers have now committed to considering sustainability in decision-making, sustainability ratings are becoming more standardized, 80 percent of Standard & Poor’s 500 companies are reporting on corporate social responsibility performances, and regulators are facilitating sustainable investing.
Hales suggests the second key for advisors is to know that extensive research has “put to rest the idea that these types of investments have a negative impact on returns.” The overwhelming evidence from thousands of studies demonstrates that ESG investing has either a positive or neutral impact on returns. In addition, studies of individual corporate performance indicate that companies with strong sustainability performance outperform others in terms of stock market performance and return on equity.
Hale explained that the third key is to understand how best to discuss sustainable investing with clients or prospects, with the “most receptive audience likely to be millennials and gen-Xers, who, surveys have shown, overwhelmingly want to express their values and have an impact through their investments. Women also express a strong interest in sustainable investing. These three groups stand to gain control of an enormous proportion of global wealth in the next few decades.”
Advisors should tune in to which clients are likely to be interested in sustainable investing and take the initiative in bringing up the subject, urged Hale.
“The fourth and final key is knowing how to assemble a portfolio of sustainable investments. Which, it is important to understand, is not an asset class,” concluded Hale. “Rather, such investments exist in all asset classes, from all capitalizations and styles of equity to fixed income to private equity. And, while product is still somewhat limited—there are, for example, 200 funds expressly identified as having sustainable objectives—countless funds take ESG considerations into account when making investments, and product offerings in all categories are growing.”
