Investing in Humanity

Sustainable Investments

By Erica Rascón on Sep 1, 2016 in Giving, News

Curious about sustainable investments? You’re not alone. Sustainable investments result in better operational performance, improved stock prices, and proven psychological benefits. So why aren’t more advisors talking about it?

JP Morgan defines sustainable investments as “investment approaches that enable investors to integrate environmental, social and governance (ESG) considerations into their investment strategies and create positive benefits for society.”

In 2014, an estimated $21.4 trillion of global assets were reported as sustainable investments. That is an $8 trillion increase from 2012.

This field of investment continues to grow due to favorable results: The University of Oxford and Arabesque Partners reports that 88% of companies that practiced effective ESG management were also able to improve operational performance. Stock prices performance improved for 80 percent of companies that prioritized ESG issues.

JP Morgan and the University of Oxford have not analyzed the warm and fuzzy sensation that can come as a result of investments with a higher purpose. But others have.

New York Times compiled several studies that examine the connection between acting for the greater good and emotions. Sources conclude that supporting causes that we feel good about reduces stress levels and can even extend lifespans. When we feel positively about a cause that we support, we are more likely to support that cause wholeheartedly and consistently.  Do-gooding simply makes us feel better about ourselves and the prospects of the world that we live in.

Meir Statman’s What Investors Really Want explains that investors value an emotional connection with the company or organization in which they are investing. Such strong emotions can “drive prices and performance above the funds and fundamentals involved,” reports JP Morgan.

With financial and personal benefits to gain, why aren’t more asset managers broaching the topic with clients? Only 63 percent of financial advisors have expressed an interest in sustainable investments. Other sources cite as little as 37 percent.

ThinkAdvisor has an insightful article that may interpret the disconnect between client and investor interests

Getting Started

Below are a few basics principals to start the conversation with your advisor, courtesy of JP Morgan:

First, identify your personal priorities. This will help you work with your advisor to create an investment portfolio that balances sustainable objectives, risks, returns, and your personal satisfaction.

Determine which approach(es) to investment best suit you:

• Exclusionary Screening entails excluding from portfolios stocks or bonds of companies that are involved in unfavorable activities. This is one of the most common sustainable investment strategies.
• Impact Investing is perhaps the second most common approach to sustainable investments. Investors aim to generate positive social and environmental impacts in conjunction with financial returns. The positive impacts are defined during investment due diligence and measured throughout the lifecycle of the investment.
• ESG Integration considers ESG issues into investment due diligence and analysis. JP Morgan states, “The principal objective of ESG integration is to ensure that relevant issues, factors and risks that have the potential to impact companies are considered alongside traditional financial analysis during the investment process.”
• Positive Screening proactively seeks companies with positive ESG performance, or positive performance of non-financial factors.
• Thematic Investing identifies companies with business models that focus on specific social or environmental topics. Such companies present innovative approaches or products as problem-solving tools.

Alternatives to Investment

Forbes highlights two ways to test out sustainable investments without funneling funds into any particular company or organization.

Shareholder Advocacy is when stakeholders use their power to influence corporate decision. The stakeholder may speak or vote in a manner which counters policies that adversely affect a demographic or the environment. Shareholders may also offer educational materials to peers in order to influence their decisions.

Community Investing directs low-interest loans towards underserved communities. Other services may include housing, educational services, community outreach programs, and healthcare.

To learn more, visit Decoding the Element of Sustainable Investing.