Is Sustainable Investing Becoming Mainstream?
If you’ve followed investment news these past three years, you may have come across terms such as socially responsible investing, ethical investing, or sustainable investing. Investors have always wanted options and diversification, but the rise of new investment strategies shows that people are becoming more aware of the impact their money has on society.
Currently, about 20% of professionally managed money in the U.S. is invested in sustainable, responsible, and impact (SRI) assets and this market is almost 14 times greater than it was in 1995.1 It won’t be long before clients ask to decarbonise their portfolio or request full fossil fuel divestment, possibly to mitigate the long-term risk carried by industries and companies that do not recognize materiality of environmental, social, and governance (ESG) criteria.
As advisors striving to meet the needs of our clients, we need to be prepared for this trend and develop a thorough understanding of the different concepts and implications of sustainable investing.
What Is Sustainable Investing?
Sustainable investing has its roots in the idea of mitigating risk in your portfolio based on how much industries and companies adhere to something called ESG, or environmental, social and governance, criteria:
Environmental: Investments go towards efforts to reduce a carbon footprint, conserve natural resources, eliminate waste, and come up with innovative solutions for energy efficiency and finding sustainable energy sources.
Social: Investments may help advocate for labor, employment, and human rights. Improving community relations on the national and international level are prioritized and ensuring the safety of products and quality of life for consumers is also a concern.
Governance: Best practices are carried out within organizations, including shareholder rights, board diversity, and anti-corruption practices. Integrity and transparency mark the organizational leadership of the businesses supported in investments.
Sustainable Investing Vs. Ethical Investing
Sustainable investing, unlike ethical investing, is not based on value judgments or personal values. Ethical or socially responsible investing can be complex since it is dependent on each person’s unique definition of ethical behavior. Despite having its own merit in the marketplace, its subjective nature makes it hard to predict its success.
On the other hand, sustainable investing is more in line with the goals of the common investor: finding the best managed, most agile and far-sighted companies to invest in with the hopes that the investment may lead to the best risk-adjusted financial return. As an example, what drives sustainable investing is not how you feel about the environment, but rather the scarcity of natural resources to meet the growing global demand.
Another term that is worth mentioning is impact investing, which is a natural continuation of sustainable investing. Impact investing goes a bit further by allowing investors to invest their money in a way that could make a social or environmental difference. Impact investing is not just about the risk in your portfolio, it’s about impacting the world with your investments.
Strategies In Sustainable Investing
In creating an equity portfolio that represents a diverse group of sustainable investments, there’s more than one way to go about it.2
Negative Screening: A typical approach is to rule out investing in any company that fails a certain set of guidelines.3 In other words, if they engage in activities that harm the environment or have a history of unethical decision-making within the company. Tailoring your investments in this way can help you steer clear of investments in out-of-touch business practices that would hurt your portfolio in the long run. However, being extreme in divesting could remove some high yield investments. Being selective about which investments to avoid could be beneficial.
Positive Screening: Strategically supporting stocks or industries that are making positive impacts on the environment and setting an example in socially responsible business practices is another way to invest. Unlike a Negative Screener, which only ensures that the investor is not supporting negative practices, investing positively can help fund changemakers and innovative problem solving specifically. While this can help pave the way for a more thriving environment in the future, using this as a sole strategy can reduce the diversification of your portfolio significantly.
Shareholder Engagement: Another approach to making an impact through investments is to engage with publicly traded companies to influence them to make environmental reforms and encourage social responsibility. You may have an opportunity to have a greater level of impact promoting green energy at a large oil company. It is a proactive way to give voice to the voiceless, advocating for corporate decisions that make positive changes for all employees and the surrounding community. Stepping into this role requires more than just your money, but also time invested into making a change as a shareholder.
The Rise Of Green Bonds
Since green bonds simultaneously achieve financial returns and have a positive impact on society, many are turning to them as a sustainable investment option. But when it comes to your fixed-income portfolio, relying solely on green bonds is still difficult. Globally, the issuance of green bonds to finance green projects increased to $82 billion U.S. in 2016 and Bloomberg and Moody’s are estimating that 2017 will see issuance amounts rise from $123 billion U.S. to $200 billion U.S. All in all, that’s a significant jump from the $33 billion reported in 2014.4
This great momentum should help to achieve the green gas emissions target laid out in the Paris Agreement.5 In Canada specifically, the current federal government is quite supportive of greener projects across the country. Moreover, we can expect to see the standardization or green label bonds in the coming years which will not only accelerate their use but also make them more accessible and efficient.
The demand from institutional investors is there and issuers such as banks, corporate non-banks, REITs, and the government have responded by expanding their offerings of green bonds. For example, in 2016 Apple issued $1.5 billion U.S. in green bonds to finance clean energy projects.6 In Canada, TD Bank, Telus, and the provinces of Ontario and Quebec are amongst recent green bonds issuers.
The future is bright for green bonds, especially with rating agencies like Moody’s and the S&P which have developed green methodologies to assess bonds. All of this data bodes well for the individual investors who want to participate in this bond market.
Is Sustainable Investing Worth It?
Focusing just on the financial side, traditional investment strategies could end up delivering long-term subpar returns due to external factors such as scarcity of resources, emission control, carbon taxes or advances in technology that affect the companies or industries. Sustainable investment also opens up a world of new opportunities, new technologies and the possibility to make a positive impact on our world.
And you don’t have to compromise your investment returns to participate in sustainable investing. According to a study conducted by Bank of America Merrill Lynch, ESG criteria may help predict future volatility, earning risk, price declines, and bankruptcies,7 and RBC Global Asset Management found that socially responsible investing does not result in lower investment returns.8
Even though sustainable or impact investing may not be mainstream yet, I certainly hope and believe it will be one day. It is capturing the interest of many investors and offering a new way to think about how you invest your money. If you are curious about sustainable investing and feel it would be an asset to your portfolio, book an appointment now! We’d love the chance to sit with you and answer any questions you may have.
Carl Martel is the president and portfolio manager of Montag Private Wealth. Along with more than 15 years of capital market experience and 10 years of experience in real estate hard assets, he is a Chartered Investment Manager® and holds a Certificate in Derivatives Market Strategies from CSI Global Education, a Masters of Science from Laval University, and an MBA from l’Université du Québec à Montréal. A focused and pragmatic, results-oriented investment professional and entrepreneur, he specializes in serving the unique financial needs of high net-worth individuals and families, foundations and endowment funds, and business owners. To learn more, visit http://montagprivatewealth.com/ or connect with Carl on LinkedIn.
2 Maximpact Blog. A Guide to the Different Types of Social Investing. http://maximpactblog.com/a-guide-to-the-different-types-of-social-investing/
3 Forbes. (2013). Socially Responsible Investing: What You Need To Know. http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/#74a133425863