What are the Benefits of Sustainable Investing?

06/07/2022 Written by: Jayne Deutmeyer, CTFA™, CPFA, CFS®, AIF®

Today’s investors believe the way they invest matters and that it’s possible to build wealth responsibly without sacrificing investment principles. Investors are increasingly seeking opportunities to invest in companies that intentionally find better ways to conduct business and manage their environmental and social risks.

Called by different names, sustainable investing refers to an approach that considers environmental, social, and governance (ESG) risks in the investment process. First launched in 1971, sustainable investment assets under management have reached $35.3 trillion, according to the Global Sustainable Investment Alliance.

Assets in sustainable assets make up over 35% of total assets under management, and despite regulatory and policy shifts, interest in sustainable investing continues to grow. Eighty-five percent of individual investors (95% of Millennials) now express interest in sustainable investing, while 52% (67% of Millennials) take part in at least one sustainable investing activity.[1]

While many people think of environmental issues, such as climate change and resource depletion, sustainable investing also considers social factors, such as employee relations, human rights, and working conditions, as well as governance factors such as corruption, diversity, and structure. Integrating sustainability issues into investments has resulted in sustainable strategies that aim to protect or enhance long-term financial value and positively impact the long-term health of the environment or society.

Owning shares in a company provides investors with the opportunity to bring important issues to the attention of company leadership. Through shareholder engagement, investors can hold companies accountable for ESG performance. According to US SIF, investors filed more than 750 resolutions relating to ESG issues from 2018 through the first half of 2020. Engagement strategies have been successful in helping shape policies and practices on sustainability issues, labor conditions, global supply chain, environmental factors, and community relations.

Sustainable investing represents various products and asset classes, offering investors exposure to investment strategies that can outperform non-ESG investments. Several reports found that sustainable funds had similar or better performance relative to conventional investments.[2] Perhaps this is because companies with good ESG performance are better able to manage risks and have lower capital costs.

ESGs have a place in defined contribution retirement plans as well. As employee demand has increased, plan sponsors are beginning to add sustainable funds to their retirement plans. Many recordkeepers provide access to sustainable funds. As with any investment, it’s essential to conduct the proper due diligence.

Building an investment portfolio is not a one-size-fits-all approach. Investors need to understand their motivation. Experienced financial advisors consider each client’s situation. They can help investors by aligning their values with their investments, integrating ESG factors into investment decisions, and engaging with fund managers to provide feedback for the achievement of ESG objectives.

[1] Morgan Stanley. Sustainable Signals 2019.


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