In recent years, Americans have grown increasingly aware of serious threats to our environment, and in turn to our everyday lives. There is a sense that our public and private worlds are on unsustainable paths, and that a tipping point may have been reached, if not already exceeded.
The financial services industry has taken note of these concerns and has begun offering more investment opportunities designed to channel money into fostering a safer, fairer and more sustainable world.
Buzzwords and acronyms abound, however, so it’s understandable that many are uncertain about what constitutes a “sustainable” investment.
First and foremost, sustainable investing is not an investment product or a separate asset class. It’s an investment philosophy. Sustainable investing refers to an investment approach that incorporates sustainability considerations in the investment process, all while seeking market-rate financial returns.
Actually, there are three related — yet distinctly different — approaches to investing sustainably.
The first of these approaches is environmental, social and governance integration. In this approach, an investor looks at how companies are managing relevant ESG topics and takes this information into consideration in what they decide to invest in. Examples of ESG topics include the ways in which companies are prepared to address climate change, whether they are playing fair with workers and customers and whether they have diverse boards or are transparent in financial reporting.
A second approach is applying exclusions, which means excluding businesses and entire sectors whose products are not aligned with investor values, such as tobacco, liquor and controversial weapons.
A third approach to sustainable investing is dubbed impact investing, which seeks to create a “better world” by purposefully seeking to drive measurable, positive social or environmental change by investing in companies that are helping to solve global challenges and committing to tracking and reporting the positive change that this investment generates.
Besides uncertainty about what constitutes sustainable investing, there are several myths surrounding the asset class itself.
Myth 1 – “Sustainable investing means sacrificing returns.” Historically, the MSCI KLD 400 Social Index, a capitalization-weighted benchmark made up of companies with high ESG ratings, has performed similarly to the large-cap S&P 500 Index. More broadly, the MSCI KLD 400 Social Index outperformed the MSCI USA IMI index, which also includes mid- and small-cap companies, over the 10-year period through June 30, 2021.
Myth 2 – “Sustainable investing is a passing fad.” Since 2014, assets managed sustainably worldwide have almost doubled to $35 trillion. Nearly three-quarters of UBS family-office clients invest a portion of their assets sustainably, and more than a third plan to make the sustainable asset class the bulk of their investments over the next five years.
Myth 3 – “Sustainable investing only includes stocks.” Portfolios of companies that meet sustainability standards can also include fixed-income securities issued by institutions, companies and municipalities. According to the Climate Bond Initiative, $393 billion of so-called green, social and sustainability bonds that fund environmental, social or sustainability friendly projects were issued by June 2021 — an amount projected to set new records by the end of this year.
Myth 4 – “Sustainable investing is only about the environment.” Combating climate change and protecting the Earth’s natural resources are only two facets of sustainable investing. In May 2021, for example, Amazon issued its first “sustainability bond,” which raised $1 billion not just for renewable energy and clean transportation but also for “sustainable buildings, affordable housing and socioeconomic advancement and empowerment.” Opportunities exist in themes related to society as well, like health-tech, edu-tech, or diversity and equality.
Myth 5 – “Sustainable investing requires too much expertise.” Certainly, identifying companies that pass multiple sustainability screens does require in-depth research. But there are numerous professionally managed ways to gain exposure to this important category of investments, including mutual funds, exchange traded funds and separately managed accounts.
Of the three major forms of sustainable investing, ESG integration is among the largest and casts the widest net.
The environmental screen identifies companies most committed to reducing their carbon footprint, cutting pollution and waste and efficiently utilizing natural resources. From a purely investment perspective, businesses that score high in those planet-friendly areas also could benefit from less government regulation while potentially avoiding expensive litigation. Since 2000, the U.S. Environmental Protection Agency has brought more than 17,000 such cases, resulting in over $61 billion in penalties.
The second ESG factor — social — is timely as well.
Consumers, employees and employers today are attuned as perhaps never before to issues of diversity and equal opportunity in the workplace. A culture of inclusion and opportunity could improve productivity while helping attract and retain talented workers. In one recent survey, more than three-quarters of respondents said that inclusivity was important in deciding where to work, and almost 40% said they would leave their jobs for a more inclusive workplace.
Finally, the governance screen in ESG recognizes companies with sound business ethics and best-practice board structures, factors that could protect shareholders against the effects of tax or earnings fraud. Since a whistleblower program was initiated with the U.S. Securities and Exchange Commission in 2012, the agency has received more than 33,000 tips about possible corporate malfeasance, mostly related to the improper accounting of revenue.
Together, toward a better world
At The Burish Group, we’re committed to driving positive change. Innovative finance, of which sustainable investing is a key component, can be good for society and good for the environment — while still generating good investment returns for our clients. Individual and institutional investors alike are increasingly drawn to this distinct strategy for putting money to work.
At The Burish Group, we want to know what you care about, and we want to address your cares with individually crafted portfolios designed to help achieve your financial and ethical goals. Our UBS sustainable investment team manages nearly a half trillion dollars in various sustainability strategies, a more than 50% increase from just two years earlier. The team utilizes a data set of more than 11,000 issuers, each with over 500 sustainability indicators aggregated into six sustainability topics that go beyond even the traditional ESG framework.
The problems that sparked the creation of sustainable investing strategies aren’t likely to go away any time soon. In fact, they are more likely to accelerate as complex environmental and social issues interact and become more front and center. That makes now a good time to adjust your portfolio to reflect these concerns. Call us today to start the conversation.
—Written by Andrew Burish, a financial advisor and managing director at UBS. He can be reached at 608.831.4282 or email@example.com.