You want to make a positive impact on the world, but you don’t want to risk your hard-earned savings in the process? We get it. We don’t want to see your retirement go out the window either. The good news is: tracking ESG performance adds a layer of safety to your investment strategy. Especially in the long-term. Here are a few reasons why:
Sustainable Is Risk Averse
The goal of investors has always been to manage risk. You want the biggest growth possible without exposing yourself to loss. Crisis and controversy cause dips in value.
Imagine an oil spill in the Pacific. There is a huge cost associated with clean up, legal ramifications for violating environmental regulations, and the public perception of the company responsible plummets. The negative effect on the company’s financial situation is compounded when the enraged public stops investing in or buying from them.
Companies that pay close attention to the environmental impact of their activities are often able to detect problems before they turn into crisis. High performance does not make a company immune to disaster, but it does decrease the probability that it will cause one. For investors, this means companies with good environmental performance are less likely to have sudden, unexpected drops in value.
Experts See The Upside
UnifyImpact is mission driven. We’re in it to help you make money while making an impact, but we’re not alone in prioritizing ESG factors. The biggest asset managers in the financial industry—the firms that manage billions of dollars of other people’s money—take sustainability as seriously as we do. Here’s what they have to say:
“Climate risk is investment risk,”
–Brian Deese, Head of Sustainability at BlackRock
“All of our top leadership have been taking crash courses in climate change and climate risk.”
–Matt Arnold, Global Head of Sustainable Finance at JP Morgan Chase
“While environmental, social and governance considerations have always had a place in our firm’s approach…these issues will only become more important as drivers of return and risk.”
–Rick Lacaille, CIO of State Street
These leaders now prioritize ESG performance in determining the value of a company or fund. When managing that much wealth, they can’t afford not to consider every possible indicator of risk.
Sustainable Performs Over Time
In ESG funds and indexes, fund managers group stocks, which they feel have high ESG performance or follow a certain set of criteria or a theme. Managers curate holdings so they continue to generate returns while supporting the mission statement.
In the old days, sustainable funds carried a stigma in the financial industry for being “low-performance,” but in 2020, there is adequate research indicating, “that there’s no performance penalty for focusing on sustainability. 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, the data shows you can make money while investing sustainably.
The World is Changing
In 2020, it is obvious that people, the planet, and the world economy are experiencing crisis in new ways. The pandemic has put a spotlight on safety standards in the workplace. The frequency of fires, hurricanes, and other natural disasters is staggering and beginning to give us a clearer picture of what the impacts of Climate Change might look like. The #MeToo and #BlackLivesMatter movements have put a spotlight on institutions that reinforce oppression and are fighting to dismantle patriarchy and racism in society and business.
Whether or not you think society is capable of turning these upheavals into meaningful progress, as an investor it’s important to acknowledge and navigate the atmosphere of change.
Hedge your bets. If investing in companies with strong track records on Environment, Social, and Governance factors can lead to higher financial returns while avoiding the risks associated with future ESG crisis and controversy, there is only upside.
Putting your resources towards the causes you believe in is icing on the cake.
Sentiment Drives the Market
The final piece of the puzzle is you.
When public perception of a company improves, more people invest in that company. When more people invest in a company, the value goes up. When public perception of a company flounders, fewer people invest in that company and the value of that company goes down. In the case of sustainability, people have strong feelings. Public perception shifts rapidly when there is new evidence of a Human Rights violation, a corrupt CEO, or a pollution travesty. Controversy affects perception which affects value.
But investors are no longer content to wait and react to controversy. As Michael Baldinger, Head of Sustainable and Impact Investing at UBS puts it, “More and more, ESG is becoming integral to driving our client engagements.” UBS is not just choosing to invest sustainably because it is risk averse, but because it is what the people want. The public is demanding better sustainability practices, and as they move their money to companies with better performance, the markets react.
When you choose to invest sustainably you are not only investing in yourself, but driving the market towards sustainability.
Do you want to use your resources to build a sustainable future for our planet and save for your retirement at the same time? Download our free app and join UnifyImpact today. Want to stay up-to-date on the latest in sustainable investing? Follow us on Twitter, LinkedIn, Facebook, and Instagram!