When sustainable investing represents 36 percent of all professionally managed investments worldwide, it is certainly something worth learning about. In 1995 sustainable assets totaled $639 billion and just 15 years later, by the beginning of 2020, that amount totaled a staggering $35.3 trillion.
What is sustainable investing?
Sustainable investing is a discipline that considers environmental, social, and corporate governance (ESG) criteria with the goal of improving investment returns and having a positive impact on society.
Sustainable investing is not a new idea. In 1760 John Wesley, co-founder of the United Methodist Church, advocated in his sermon “The Use of Money” to gain all you can, but without hurting our mind any more than our body, and without hurting our neighbor. 211 years later in 1971 two United Methodist ministers launched the Pax World Fund, the first publicly available mutual fund to use ethical as well as financial screens in its investment decisions.
Since the founding of the Pax World Fund 50 years ago, momentum for sustainable investing has grown dramatically. Today there are many sustainable investment options for investors. For example, the investment company BlackRock, which manages over $9 trillion, is using ESG integration firm-wide because BlackRock believes “that sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors over the long-term.” Another example of sustainable investment options is the exchange-traded funds (ETFs) lineup offered by the investment company Nuveen which manages $1.2 trillion. 11 of the 16 Nuveen ETFs are ESG specific funds.
Let’s get a better understanding of exactly what ESG is.
E is for Environmental.
When selecting stocks to invest in, an ESG investor asks, “how is this company at being a steward of natural capital?” For example, has the company had any environmental fines, and what programs and policies does the company have to mitigate environmental damage in the future? Environmental criteria include natural resource conservation, treatment of animals, energy use and renewable energy, waste and pollution, water usage, carbon footprint, use of toxic chemicals in manufacturing, resource management, and employee incentives for carshare and bicycle commuting.
S is for Social.
An ESG investor asks, “how does this company manage its relationships with internal and external stakeholders?” For example, does the company provide a positive workplace environment where employees give their best because they want their company to succeed, or does the company provide a negative environment where disgruntled employees may contribute to the company’s downfall? Social criteria include employee health and safety, hiring practices, gender and racial diversity, third-party contractor labor policies, office benefits, corporate giving strategies, and employee volunteer programs.
G is for Governance.
An ESG investor asks, “how effective is the board and management team at running the organization for their shareholders?” For example, is executive compensation aligned with long-term shareholder success, or are executives paid no matter how the stock performs? Governance criteria include transparent and accurate accounting methods, business ethics, share class structure, stockholder rights, management structure, board diversity, executive pay, and directors’ conflicts of interest.
Do you have to give up investment performance with ESG investing?
Not necessarily. Although not all ESG investments and criteria are the same, ESG investing may reduce certain risks and uncertainty. In fact, during the recent period of investment risk related to the COVID-19 pandemic, 19 out of 26 ESG funds with more than $250 million in assets under management outperformed the S&P 500 Index between March 5, 2020, and March 5, 2021, by focusing on governance practices, sustainability scores, disclosure practices, fossil fuel exposure, adherence to religious principles, and workplace diversity. And out of 1141 research papers from 2015 through 2020 examining the relationship between ESG and financial performance, 59% showed similar or better performance and only 14% found negative performance for ESG investing compared to conventional investment approaches.
The world is changing. Many investors want their investments to align with their values. Even CEOs of major corporations are embracing the idea that business can build a better society. For decades corporations believed the primary purpose of a corporation was to maximize profits for shareholders. But in August 2019 the Business Roundtable made up of 200 corporate leaders including the CEOs of Apple, JP Morgan Chase, Amazon, IBM, and General Motors, issued a statement committing to delivering value to customers, investing in employees, dealing fairly, and ethically with suppliers, supporting the communities in which they work, and generating long-term value for shareholders.
At GreenUp Wealth Management we offer investment models with an ESG focus, selecting from what we believe are the best of the best ESG fund options. If you are one of the many investors who are interested in sustainable investing, talk to your GreenUp Wealth Advisor about how to incorporate ESG into your portfolio.
Summary
- Sustainable investing represents over 1/3 of all professionally managed investments worldwide and that share is growing.
- Sustainable investing is also known as ESG investing, focusing on Environmental, Social, and Governance criteria when selecting investments with the goal of improving investment returns and having a positive impact on society.
- You do not necessarily have to sacrifice investment performance to invest with your values in mind.
Citations
1. “Global Sustainable Investment Alliance Releases Global Sustainable Investment Review 2020.” USSIF.org, The Forum for Sustainable and Responsible Investment, 19 July 2021, 03:12:53, www.ussif.org/blog_home.asp?display=173
2. Carlson, Debbie. “ESG Investing Now Accounts for One-Third of Total U.S. Assets under Management.” MarketWatch, MarketWatch, 17 Nov. 2020, www.marketwatch.com/story/esg-investing-now-accounts-for-one-third-of-total-u-s-assets-under-management-11605626611
3. “Global Sustainable Investment Alliance Releases Global Sustainable Investment Review 2020.” USSIF.org, The Forum for Sustainable and Responsible Investment, 19 July 2021, 03:12:53, www.ussif.org/blog_home.asp?display=173
4. “Jack Corbett Remembered, Mourned by Pax World Family.” CSRWire, 27 Mar. 2003, www.csrwire.com/press_releases/23234-jack-corbett-remembered-mourned-by-pax-world-family
5. “Top Banks.” ADV Ratings, 1 Sept. 2021, www.advratings.com/company/blackrock
6. “BlackRock ESG Integration Statement.” BlackRock.com, 19 May 2021, www.blackrock.com/corporate/literature/publication/blk-esg-investment-statement-web.pdf
7. Nuveen. “Nuveen by the Numbers.” Nuveen, Nuveen, 25 Aug. 2021, www.nuveen.com/en-us/about-us/about-nuveen/nuveen-by-the-numbers
8. “Exchange-Traded Funds.” Nuveen, Nuveen, www.nuveen.com/en-us/exchange-traded-funds
9. Esther Whieldon, Robert Clark. “ESG Funds Beat out S&P 500 in 1st Year Of COVID-19; How 1 Fund Shot to the Top.” Accelerating Progress, S&P Global, 6 Apr. 2021, www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/esg-funds-beat-out-s-p-500-in-1st-year-of-covid-19-how-1-fund-shot-to-the-top-63224550
10. “Experience Stern: Faculty & Research.” NYU Stern, 10 Feb. 2021, www.stern.nyu.edu/experience-stern/faculty-research/new-meta-analysis-nyu-stern-center-sustainable-business-and-rockefeller-asset-management-finds-esg
11. “Our Commitment.” Business Roundtable – Opportunity Agenda, Business Roundtable, https://opportunity.businessroundtable.org/ourcommitment/
GreenUp Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
