Have you heard the term “Responsible Investing” or “Sustainable Investing” and thought, is this just a marketing ploy? In fact, the concept has really taken off because investors, large and small, have been demanding it. We recently conducted a webinar with Christine Calderon and Carly Barton from Bank of New York Mellon Wealth Management where we investigate why it is more than just a trend, and how to get started with Responsible Investing.
When discussing trends being seen with individual investors, Calderon notes, “We have seen a significant increase and interest in Responsible Investing over the last decade. You can no longer turn on the television or read the news and not see a story related to Environmental, Social, & Governance Risks (ESG). The topics have become even more prevalent in the past year as we have been focused on social justice, health and environmental concerns. This focus has translated into an uptick in clients wanting to impact change and make a positive difference with their investments.”
As part of the process of working with a client on their investment strategy, Calderone states that they will go through a series of questions to understand the objectives of the client to set the best framework for achieving their financial goals. And when a client expresses wanting to have a more socially responsible investment strategy, they then dig deeper into the specific areas or concerns for the client where they want to focus their dollars. Often clients and families express interest in getting involved in responsible investing, but there are concerns or misconceptions that they have to give up performance to do so. Calderon is frequently asked, “Is Responsible Investing a passing fad?” or “Do I have to give up performance to meet my individual goals?”
Responsible Investing Continues to Grow
The numbers show that this is not the case. In the U.S. alone over the last decade assets invested sustainably have grown to over 17 trillion dollars. Compared to a total amount of assets managed in the US, that equates to about one third of total assets invested. Additionally, assets invested sustainably globally have grown to over $30 trillion dollars.
Since 2009 there has been an increase in funds available that identify themselves as an ESG, Responsible Investing, Sustainable Investing, or a Green Investment fund. And starting in 2018 there has been an exponential increase in funds that state they have an ESG mandate or framework. Because of this Calderon says that, “we pay close attention in our due diligence process and make sure the funds are truly incorporating an ESG framework, that they are doing the research on the companies they are investing in, and they are fulfilling that metric and not greenwashing.” Greenwashing is a term used to describe when a company is conveying a false impression or providing misleading information to make them appear to be more environmentally and/or socially responsible than they are.
Responsible Investing Outperforms
With respect to performance, there is a misconception that there is a performance penalty to investing in ESG. If you look at the performance history, this proves not to be the case. The KLD social index, launched in 1990, is an index of the top 400 ESG rated companies compared to the S&P 500. Since the inception of the KLD index it has outperformed over the long-term. This goes for both the US and Global Indexes. Calderone says, “as investors we know that past performance isn’t indicative of futures returns but this is a significant track record here.”
With respect to performance and the due diligence of responsible investing, Calderon notes, “There is a significant risk component to it. We find that the companies that are involved in responsible investing are really taking a look at all the risks - not just risks that show up on the balance sheet, but those risks that don’t, such as human capital. Intangible risks do have an impact on stock price, valuations & investor sentiment. Responsible Investing provides a more holistic approach to risk management within that framework.”
So how does an individual approach responsible investing? Carly Barton explains a concrete example of helping a family achieve their responsible investing goals.
“In this example we worked with a family, who had sold an interest in a private business and had experienced a meaningful liquidity event. The family had an investment portfolio prior, and had invested in a more traditional way. We call this two pocket thinking where you invest in a more traditional way and distribute to philanthropies and causes that you believe in. With this tranche of funds, they wanted to do things differently and wanted their values to be across all decisions they were making across financial resources. We spent a lot of time understanding what their key priorities were. In this case the environment was the primary focus so we created a bond portfolio focused on clean energy while still considering terms and taxation. Instead of screening out “sin stocks”, they wanted to reward companies that were doing good. We were able to create a portfolio for them that did just that, where there was active proxy voting and company engagement by the manager to ensure that their equity component was working for them but was also in line with their values.”
Excerpts from Dream Source Solutions April 22, 2021 Earth Day Webinar: Bringing Sustainability to Life. Focusing on the “E” in ESG.