Back in the day, investment advisors looked down on values-based investing. They understood some clients cared about the world, but felt values had nothing to do with making money. Investors who wanted to have a positive impact had little recourse except to avoid the worst-of-the-worst. It took decades of research for values-driven investors to get beyond exclusion and come up with a more modern way of looking at things. Sustainable Investing considers Environmental, Social and Governance (ESG) factors alongside traditional investment strategies to avoid risk and generate better long-term returns.
Here’s a little guide to help you get hip to how values-based investing has changed over time, and why “sustainable” is the way to go.
When ESG factors were first considered in investment strategy, the theory was “exclusionary,” i.e. by excluding “sin-stocks,” such as alcohol, tobacco, and firearms from an investment portfolio, the stockholder would be absolved of responsibility for the negative social impact of those products. Financial advisors and asset managers were wary of these considerations and framed ESG factors as moral perspectives unrelated, and even adverse to their goal of increasing returns. Tobacco, for example, was profitable no matter what it did to peoples’ lungs.
Advisors encouraged clients to compartmentalize. Use money to make money, and express values somewhere else. Those who cared about the world struggled to decide where they actually did want to put their money. Some, “socially responsible investors,” ignored their advisors and traditional investment strategies and made risky choices on companies with good moral standings.
This kind of thinking positioned “Wall Street” and progressives as bitter enemies. Think back to a decade ago, when the Occupy movement first took shape. People were shouting in the streets that Wall Street was designed to empower the 1% at the expense of the rest. The assumption was that public companies wanted to make money for their shareholders and didn’t care about anything else. Progressives who did have the resources to invest feared they would have to compromise on morals to put money in the stock market, or they would lose it.
Closing the Gap
While distrust of Wall Street remained, the success of new financial instruments started to shed light on a new way of understanding values-based investing. With the creation of ESG funds and indexes, fund managers grouped stocks, which they felt had high ESG performance or followed a certain set of criteria or a theme. Investors could purchase a fund and managers would make sure it generated returns and reflected the values defined in its mission statement. Initially these funds also carried a stigma in the financial industry for being “low-performance,” but they were an easy place for hands-off financial advisors to direct values-driven clients.
Because the finance industry tracks everything that affects value, in 2020 there is adequate research indicating, “that there’s no performance penalty for focusing on sustainability.” As MorningStar’s John Hale puts it, “Consistently over time, sustainable portfolios perform just as well as conventional portfolios that don’t consider ESG factors.” Similarly, the oldest socially responsible index (MSCI KLD 400) has steadily kept pace with the S&P 500 since the 1990s.
In short well-managed sustainability-themed indexes and funds proved you actually can invest sustainably and make money. This research has been a wake up call to investment advisors who discouraged values-based investing early on.
Lately, asset managers are starting to see Sustainable Investing as more than a viable alternative to traditional investment strategy. In a recent Bloomberg interview, BlackRock’s Brian Deese suggests all responsible asset managers must now consider ESG factors as a form of risk aversion. The impending threat of Climate Change, for example, means that companies that do not consider environmental impact are vulnerable to major dips in market performance in the future. Companies that do not perform well in corporate governance, particularly regarding gender equity are at risk of #MeToo crisis, which can lead to dips in market performance. Though value may have increased up until now, it can be expected to fall off if a company does not have strategies for navigating climate crisis and a plan to find its place in the growing green economy.
The idea that tracking ESG factors can be a form of risk aversion has completely upended the way the finance industry thinks about values-based investing. To put it simply, the two forces that once were bitter enemies have discovered a common purpose. If you have the right tools to build a sustainable investment portfolio, progress and money no longer have to be at odds.
At long last, the trend towards Sustainable Investing is pervasive across the financial industry. MorningStar, has introduced a Sustainability Rating system in its financial advising platform, Black Rock, the world’s largest asset manager has, “announced that sustainability would be its “new standard” for investing and urged corporate CEOs to recognize that “climate change has become a defining factor.” State Street declared it would “use its proxy voting power to “ensure companies are identifying material ESG issues and incorporating the implications into their long-term strategy.” Goldman Sachs, is targeting $750 billion in sustainable investments this decade.
Lo and behold, major corporations have responded to this trend by pledging improvements in their ESG performance in the years to come. Microsoft announced it would be carbon negative by 2030. Starbucks is committed to improving carbon emissions and eliminating waste and water usage. The implications are: when the money moves, the corporations follow.
Making an Impact
At UnifyImpact we take Sustainable Investing beyond both “a viable alternative” and “risk aversion.” We want to help our users make an impact. We help our users bolster companies who are building a sustainable future for the world around us. Investing directly in a company that has high labor standards and cutting edge ways of monitoring its supply chain, as well as high environmental standards, is a way to create more sustainable jobs and mitigate the effects of climate change, rather than simply avoiding investing in companies that fail to do so.
More importantly, at UnifyImpact, we believe that everyone deserves access to sustainable investing. Just because the institutional investors and major asset managers did the research doesn’t mean they should have the exclusive right to gain from it. With the right tools you can stop simply avoiding the bad and create new roads to the world you want to live in.
Conclusion: Is it more effective to avoid the stock market or to change it from the inside? Tag UnifyImpact in your Facebook @UnifyImpact and Instagram @UnifyImpactApp posts so we can see and share your posts on our channels. Or Sign Up For Free to get started!
More about UnifyImpact
UnifyImpact is a platform designed to help individual investors make sustainable investment decisions. The web-based application rates public companies based on environmental, social and governance (ESG) factors to help investors make informed decisions that align with their personal values. Members can create a profile based on values that are most important to them, track the progress of companies they’ve invested in and read up on news based on their investment portfolio. Sign Up For Free to get started!