Is Sustainable Investing Here to Stay?
Written by: Courtney Ranstrom, CFP, MBA
Anyone who knows me well knows that I am not prone to fads. I’ve never been a first adopter of anything. I didn’t get my first iPhone until 2011. I still won’t buy cryptocurrency (which may or may not be a fad, but I believe it’s too early to know). So, what do I do when the area of finance I’m most passionate about gets labeled a fad?
Lean into it.
Socially responsible investing and utilizing ESG criteria (environmental, social, and governance) in investment selection has been a long-time passion of mine.
I’ve never seen it as a fad, despite the current excitement around creating ESG products, and I’m glad the larger investing community is waking up to it.
Over the years, there have been many terms to describe sustainable investing. Professionals still don’t agree on how each term should be used, but here’s how we, and many others, define each of the commonly used terms in this area:
Common Terms for Socially Responsible Investing
ESG is the acronym for Environmental, Social, and Governance data. Investors use this data along with financial data to evaluate companies and understand their risks and opportunities. We use this term most frequently in our practice. I believe a large part of ESG investing is managing risk in a portfolio and reviewing how companies manage the financial impacts of climate change, extreme weather, stranded assets, labor practices, management accountability, etc.
SRI is the acronym for Socially Responsible Investing. This term is tricky as it means different things to different people. SRI generally expresses investor values via investment selection or divestment, shareholder engagement, and proxy voting. Many people use it to refer to sustainable investing, though it can refer to any area where we are expressing a value. For example, in my personal portfolio, I do my best to divest from tobacco companies. In part, this is a values-based decision.
Impact Investing generally refers to private investments in companies whose mission promotes social and/or environmental good. It can also refer to lending to underserved communities.
Sustainable Investing is a catch-all term that is often used interchangeably with the above terms. You will also see sustainability ratings (often based on environmental data) put out by various companies, such as Morningstar.
What is Green Washing?
ESG investing isn’t without its frustrations. In recent years, many mutual funds and ETFs (exchange traded funds) jumped on the ESG bandwagon and rebranded their funds as ESG without putting the work into determining if their underlying investments actually met ESG criteria. In the industry, we call this greenwashing, and even the SEC has gotten involved in evaluating this area. In addition, many funds are not putting in the work of shareholder advocacy and proxy voting, which can push companies to effect change in their own policies and practices. In the two years since I last spoke at a conference on this topic, a slew of new funds has popped up requiring increased advisor due diligence in evaluating if the fund is actually investing according to ESG criteria or is simply greenwashed.
Doing Well by Doing Good
So, can we do well by doing good? I want to believe yes, but I don’t have a crystal ball. Heck, I don’t even have a Magic 8 Ball! Historically, ESG investment returns haven’t outperformed the S&P 500, but they haven’t significantly lagged the index either. I believe that companies must look at all their stakeholders (employees, vendors, customers, etc) to fully assess their businesses, opportunities for financial growth, and related risks. It seems short-sighted to only focus on keeping stockholders happy. I also believe that over the long-run, businesses that pay a living wage, don’t exploit workers, lower their carbon emissions, and take seriously the Paris Climate Accords will do better. Even though the upfront costs of a lower carbon future can seem steep, I believe the long-term risks of climate change will cost far more than our investment in a more sustainable future.
To highlight the work that is happening in the ESG space and provide a curated source of both good and not so good news, I’m starting a quarterly ESG newsletter with the first issue going out in early November. If you are interested in receiving it, please let me know.
In the meantime, if you are interested in utilizing ESG investments in your portfolio, please reach out and set up a time to meet via the link below. We don’t view ESG investing as something that everyone must do. However, as part of our holistic financial planning services we make it available to those who are interested.