Explore four reasons many investors look closely at ESG criteria.
Sustainable investing is an approach that supports companies proactively managing environmental, social and governance (ESG) issues. The top motivations for investing this way may surprise you.
1. Risk mitigation
Institutional investors often cite the importance of mitigating environmental, social and governance (ESG) risk. Protect the downside, right? Environmental degradation or data breaches can impact a company’s bottom line. These cautious optimists look for companies trying to get ahead of regulations for the right reasons.
No, we don’t mean value. We’re talking about those who invest in companies whose practices align with their own moral compass. This practice traces back to people who refused to invest in the slave trade and still resonates today, with mutual funds that seek to promote women in leadership or adhere to religious values, and green bond funds that finance projects related to renewable energy or river and habitat restoration.
A more conscious approach can help investors make a positive impact. Like a 2016 impact investment in Civic Builders that built a new school to serve a city in financial ruin with a 29% poverty rate. Or an investment in funds that build affordable housing for disabled people.
4. Long-term performance
Slow and steady, like the fabled tortoise, the long-term investor sees growing evidence that integrating ESG principles has the potential to positively impact risk-adjusted performance. In the past few years, companies with higher ESG ratings exhibited higher average return on invested capital, compared to companies with lower ratings, according to data provider MSCI. This is in part because ESG pushes companies to look beyond the three- to five-year business cycle in evaluating risk.
Whether you’re interested in making a positive impact or want to avoid ESG risks, a financial advisor can help you customize a sustainable investing strategy that fits your financial and personal goals.
Sources: 2018 Global Sustainable Investment Review, US SIF, CNBC, MSCI, Global Impact Investing Network.
Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Because SRI criteria exclude certain securities/products for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria. Investors should consult their investment professional prior to making an investment decision.