How to choose companies with positive ESG attributes
What accounts for ESG’s growing popularity?
Why the future of investing may be a responsible one
What is Sustainable Investing?
You recycle, compost and avoid purchasing single-use plastics. You support social justice initiatives and local diversity projects. But what about your portfolio? How can you take better control of your investments to ensure they align with your values and have a positive impact on the world around you?
Welcome to sustainable investing, an investment approach growing in popularity. And it’s not hard to see why. To provide context, let’s first define some essential terms.
Responsible investing (RI) is the broad umbrella used to describe this space, of which sustainable investing is a key subset.
Environmental, Social and Governance (ESG) factors provide a framework for breaking down the concept of sustainability into the three primary areas of responsible investing.
An ESG integration strategy can apply to any portfolio. It includes an analysis of ESG issues affecting a company as part of its valuation.
The concept of sustainability is based on the idea of meeting current needs without compromising the ability of future generations to meet theirs.
The Sustainable Development Goals (SDGs) – established by the United Nations in 2015 – have become the gold standard for conducting progressive dialogue with corporations about their sustainability approach.
Sustainable investments apply a ‘positive screen’ to identify companies that are ‘best-in-class’ among their peers in terms of their ESG ratings. Sustainable funds will apply ESG integration and ethical screens in addition to investments in companies committed to enhancing global sustainability efforts.
An investor may assess a company’s carbon footprint, for example, or its commitment to cleantech. Social considerations can include a company’s stand on human rights and racial equity, whether among its employees or its supply chain. Governance factors may take into account the quality of its management and board, as well as things like shareholder rights. By being more selective, an investor not only supports companies with established ESG practices, they encourage others to be transparent and change their practices.
Growth of Sustainable Investing
At the heart of sustainable investing is the idea that money can be a powerful force for change. Its popularity is rooted in the rising demand among millennials and other conscious consumers for greater transparency and ethical standards in daily purchasing decisions. In the same way a shopper decides to purchase an environmentally sustainable item (e.g., clothing made from recycled materials), an increasing number of investors are looking to invest in companies that align with their values.
Unquestionably, the younger generations have established themselves as the trailblazing sustainability champions. The Responsible Investment Association found that 90 percent of young people are interested in RI.
But many others are following suit. According to Bloomberg Intelligence, there are approximately US$35 trillion sustainable investment assets today (up from US$30.7 million in 2018), with the number likely to grow to US$50 trillion by 2025.
Morgan Stanley’s third Sustainable Signals survey1, found that 8 in 10 U.S. investors demonstrated interest in sustainable investing, while half partake in at least one sustainable investing activity.
A report by the Global Sustainable Investment Alliance, moreover, states that Canada and the U.S. saw the strongest growth in the area over the last two years, at 48 and 42 percent respectively. The investment landscape is going through a significant transformation, with sustainability moving swiftly from the sidelines to mainstream practice.
Is Sustainable Investing Profitable?
Many assume responsible investing necessitates a sacrifice of returns. But the reality belies that assumption. In fact, studies have shown that sustainable investing can be financially beneficial for investors and companies.
In 2020, for example, an analysis by S&P Global Market Intelligence found that many large investment funds with environmental, social and governance criteria outperformed the broader market. Moreover, fourteen of 17 ESG-focused exchange-traded funds outperformed the S&P 500 from January to May.
It should be noted that the Morningstar U.S. Sustainability Index – a collection of the 50 U.S. large-cap stocks with the best sustainability scores – fell 6.9 percent in the first quarter of 2022. This represented an underperformance of 1.5 percent relative to the broader Morningstar U.S. Market Index.
However, longer-term results still demonstrate the attractiveness of sustainable equity strategies. Over the past five years, the Morningstar Sustainability Index closely tracked its Market Index with both posting returns of 15.5 percent. Additionally, the Sustainability Leaders Index saw gains of 17.3 percent, proving that you don’t need to give up performance to invest sustainably.
The Future of Sustainable Investing
In a 2020 letter to CEOs, Larry Fink, CEO of BlackRock, said he would “place sustainability at the center of our investment approach.” He added that he would be doubling the number of ESG exchange-traded funds to give clients more choice on how to invest their money. BlackRock is one of many investment firms expected to increase their ESG offerings.
A growing number of companies, moreover, are pledging to become more ESG-compliant, realizing they must heed the rising demand of socially conscious investors and consumers.
Of course, as ESG investment products multiply in the market, it can be difficult to discern “sustainable” from “hype”. But, with the help of professionals and analytical tools, evaluating whether a fund truly incorporates clean investments has become easier. To wit: finance giant MSCI issues ESG ratings for over 8,500 global companies, while also providing information on the share of revenue in a fund considered sustainable.
Moreover, the implementation of greater standards helps investors stay well-informed. The European Union’s incoming legislation, for example, will require investment funds to substantiate any “sustainable” label placed on a product.
People are increasingly conscious of the impact of their choices and committed to caring for people and the planet. The perceptible shift is influencing shopping habits as well as investment decisions.
BMO Private Wealth investment professionals can help you explore your investment decisions and offer a wide range of responsible investing solutions. If you’re ready to embrace a sustainable portfolio, contact your BMO Private Wealth professional to discuss the next steps.
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1Morgan Stanley Institute for Sustainable Investing