Most Americans don’t think fondly of the financial industry. At least, for those of us who have been paying any attention to the economy in the past twenty odd years, it’s hard not to remember the subprime mortgage crisis, a long list of accounting scandals, and many of the largest corporate bankruptcy filings in history. Today, we’re still plagued by financial uncertainty in the aftermath of the greatest recession of our time.
Whether we are from Generation X, Y, or Z, we (or others on our behalf) are constantly planning for our futures. In doing so, we would be wise not to follow in the footsteps of those who so irresponsibly put personal gain before our collective financial security as well as the health of the world.
Luckily for all of us, personal gains and societal benefit are no longer in conflict. Financial institutions are proving that impact investing can allow investors to target social and environmental improvements while still earning a healthy financial return.
Just recently, a number of large institutions, including Norwegian financial services group Storebrand and Dutch bank Rabobank, divested from fossil fuels and are looking to invest sustainably in clean energy and energy efficiency assets.
Earlier this month, financial services firm UBS released a report on sustainable investing, outlining how it offers competitive investment results, allows investors to use their assets to make an impact and express their values, and enables companies to better preserve and create value for stakeholders.
With large financial institutions taking the lead, the transition to sustainable investing as a win-win for both investors seeking returns and those wanting to make an impact is already underway. Regardless of whether we are saving for college, beginning a long-term career, or saving for retirement, sustainable investments could be good for all our portfolios. Here are some highlights on sustainable investing from the UBS report.
Sustainable Investing Has Been Around Longer Than you Think
While sustainable investing is a new concept to many, it actually dates back several hundred years to times when Islamic, Jewish, and Christian religions made economic and investment decisions based on faith. The first ethically-focused investment fund, the Pioneer Fund, was created during the Prohibition Era to discourage investors from putting their money in alcohol, firearms, tobacco, and other “sin” stocks.
The civil rights movement prompted many to reevaluate their investment decisions as socially responsible investing (SRI) and activist investing became new methods for citizens to influence the capital of controversial companies by divesting from them and putting their money in socially responsible ones instead.
Around the same time, the concept of sustainability began to emerge on the world stage, but for much of the decade that followed, investors still did not prioritize environmental or social concerns.
Since the turn of the millenium, however, sustainable investing has evolved from its early focus on divestiture to one that encourages considering environmental, social, and governance (ESG) factors for their potential to increase financial returns.
UBS defines sustainable investing as follows:
“Building on traditional investment approaches, sustainable investing incorporates environmental, social, governance and other fundamental sustainability factors into the investment decision-making process to both preserve and create value for investors. This rounded approach to investing seeks to generate competitive risk-adjusted returns. It also provides a framework that enables investors to have their values reflected in their financial portfolio and have a positive impact on society through their investments.”
Sustainable Investing Does Not Require a Trade-off
Many investors still believe that a focus on sustainability in investments implies some sort of trade-off. Though certain sustainability-oriented funds have produced mixed results in the past, the risks and returns are no worse than any active investment approach.
On the contrary, according to the report, many investors don’t realize there is ample evidence to indicate that companies with higher sustainability scores can and do generate financial performance competitive with the broader US equity market.
The MSCI KLD 400 Social Index is a well-known index that includes 400 US companies with strong ESG ratings. Since its inception in the early 1990s, the index has delivered competitive results when compared to the broader US equity market.
Of course, performance results aren’t the only thing investors look to when calculating the value of an investment, but investment portfolios with a sustainability focus also address investors’ significant concerns about volatility and risk. Couple these with the value creation and preservation inherent in sustainable or impact investing, and you start to see a truly “triple bottom line” investment strategy.
Successful businesses now must deliver economic, social, and environmental benefits, and investors are catching on.
How to Make Your Portfolio More Sustainable
The UBS report offers a number of considerations to take into account when building a sustainable portfolio–and we encourage you to read these in the full report–but we’ve included some of the more notable recommendations here.
1. Look beyond stocks. A comprehensive approach to sustainable investing should evaluate ESG risks within each asset class, not just stocks, to ensure consistency across the entire portfolio.
2. Try to better understand the ESG risks associated with investments in commodities. If commodities investing conflicts with your individual values because of perceived links to social or environmental concerns, you may not wish to invest in that asset class altogether.
3. Consider private equity firms that boost performance through eco-efficiency goals. Impact investing, which has roots in traditional private equity, pursues both social and financial returns.
The report also encourages investors to take a personalized approach. Investors should pursue sustainable investing strategies such as performance, impact, and values as they make sense to the individual. Ultimately, sustainable investing can accommodate a wide range of investor goals, whether they relate to higher returns or an investor’s values and desire to make an impact.
A New Class of Investors
The UBS report and similar calls for sustainable investing from other financial services groups should affect the way we will invest in the future. At the very least, it will distance us from an unproductive all-or-nothing approach where competitive returns must conflict with holding true to our personal values and desire to make an impact.
It is still our responsibility to invest in social and environmental progress, though, if we wish to see lasting changes. Thankfully, we no longer have to choose between doing well financially and doing good for the world.
Disclaimer: Any opinions expressed herein by persons not affiliated with Mosaic reflect the judgment of the author and not necessarily that of Mosaic. Nothing herein shall constitute or be construed as an offering of securities, or as investment advice or recommendations by Mosaic. Mosaic’s investments are limited to investors who meet applicable suitability standards based on income, net assets and state of residence. Please click here to learn more.
(Image source: Bloomberg)