What is Sustainable Investing?

| August 12, 2021 | 0 Comments

One of the more interesting trends in the investment industry is a shift by investors towards a greater use of sustainable investment strategies. This isn’t a new thing, but it is a trend that has been accelerating in recent years as global warming has become more of a concern. So it begs the question, just what is sustainable investing and how does one do it?

Investing with an eye towards social goals has been around since at least the 1800s when the Methodist Church encouraged its members to avoid investments in companies involved in alcohol, tobacco, weapons and gambling. In the 1960s and 70s, during the civil rights movement and the Vietnam war, consumer activism drove renewed interest in aligning spending and investing with personal values. The first socially conscious mutual fund was launched by Pax World in 1971, designed then to avoid investing in companies that were contributing to the Vietnam War. In 1986, with the anti-apartheid movement in full swing, the first shareholder resolution was launched by a socially conscious mutual fund, marking a change from simply excluding ‘bad’ companies to pushing corporations to be better.

During the 1990s, in part in reaction to the Exxon Valdez disaster in 1989, investors broadened the focus from simply the avoidance of ‘sin stocks’ like alcohol and tobacco to including environmental factors.

Current efforts to align values with investments tend to focus on environmental, social and/or governance (“ESG”) factors and are lumped under the label of “Sustainable Investing.” Environmental factors can include energy use, pollution and farming practices. Social considerations will look at how the company impacts society, such as product safety, employment practices and how they impact the communities in which they exist. Governance factors include a company’s accounting policies, executive compensation, board structure and general ethical behavior.

The investment thesis is that in the long run, companies which behave better spend less money on fixing problems, public relations, or lawsuits, and are thus better long-run investments. There are several different ways in which funds achieve these objectives:

  • Negative Screening. Funds will exclude stocks in certain industries or with certain unwanted revenue sources or practices. This is the most basic level of socially aware investing.
  • Positive Screening. Funds will look for stocks or industries with desired attributes and add them to the portfolio.
  • Tilting. Funds will use ESG factors to over, or underweight securities.
  • Thematic. Funds will focus on specific ideas or industries, like renewable energy.
  • Impact Investing. The fund will make investments not just for financial returns but to try to effect some kind of social or environmental change as well.

Sustainable funds may invest in stocks, bonds, real estate and other assets, depending on the investment objectives of that fund.

While many funds may include the word ‘sustainable’ in the label, investors need to do their homework as to how that fund executes its strategy. Some funds are merely ‘aware’ and may include social or environmental factors merely as an afterthought. Others are much more assertive and will use their capital to push shareholder engagement and file resolutions to change the behavior of the companies they own.

Finally, no one sustainable fund will not be right for everyone. If you are going to make an investment with environmental or social goals in mind, you need to make sure that the fund you’ve chosen aligns well with your values. Many focus on religious social screens, while others may concentrate on environmental concerns. There are solutions for larger accounts to narrowly customize their investing impact, but mutual funds and exchange traded funds will generally require some compromises.

Just trying to find the right mix of investments to achieve your financial goals can be complex enough without adding these additional factors on top. But if aligning your values with your dollars is important to you, a Certified Financial Planner™ Professional can help you get started.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at rbrooks@bfadvisors.com. Brooks and his family live in Mission Hills.

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