I’ve seen a number of interesting trends emerge throughout my 25 years in the investment industry, but one in particular has been gaining momentum over the last decade or so: sustainable investing. Often referred to as socially responsible, ethical, or values-based, investing in a manner consistent with one’s values isn’t a novel concept. Back when I was in college in the mid-1980s, much attention was paid to divesting from South Africa with the goal of ending apartheid in that country. But, for a long time, it seemed that such practices weren’t taken that seriously within the broad investment community. Sometimes dismissed as “investing with your heart,” many viewed sustainable investing as quaint and naïve, somewhat on the fringe and not terribly practical.

Fast forward to today, and times have definitely changed. Sustainable investing is now taken quite seriously in Europe, and it has been gaining more currency within the United States. Large and influential institutions such as CalPERS (The California Public Employees' Retirement System) have allocated significant sums as a way to influence corporations to engage in more socially desirable behavior and practices, as well as an effort to manage risks or identify new opportunities in their portfolios. Individual investors increasingly seem to be following suit, and they are seeking information about their investment options.

SEI conducted a sustainable investing survey of nearly 800 registered investment advisors and found that 42% reported their clients expressing some interest in sustainable investing. However, 40% of these advisors “feel that they still do not know enough about sustainable investments to make suitable sustainable investing recommendations to clients.” Anecdotally, I have heard from more and more advisors inquiring about the topic, which is why I plan to write a number of posts about sustainable investing and related issues. The goal is to help you confidently answer your clients’ questions.

The explosion of interest in sustainable investing has resulted in a complex and ever-expanding lexicon of terms that can be confusing for individual and professional investors. So, I thought it would be helpful to explain how SEI defines key terms. SEI uses “sustainable investing” as a broad umbrella term under which a number of specific investment approaches fall. These include “exclusionary investing” (sometimes called negative screening), which involves excluding certain sectors, companies, or practices from a portfolio based on specific screening criteria, such as tobacco companies, firearms manufacturers or even sector-agnostic values (e.g., companies that do not actively promote gender or racial diversity/equality). ESG integration incorporates environmental, social, and governance factors into the analysis and selection of investments. The goal is to find and own exemplary companies that perform well on these factors, such as a company with a diverse board of directors. With “impact investing,” one targets investments to generate a social or environmental impact alongside a financial return, such as investing in a startup that develops novel clean energy technologies.

These approaches can be implemented in a number of ways, using either pooled vehicles, such as mutual funds and ETFs, or through the direct ownership of individual securities. Whichever vehicle the investor chooses, the challenging part is determining which specific issues are to be either excluded or emphasized. Sometimes it’s obvious when a company is involved with a particular product or business practice, but often it isn’t clear, especially with firms that have multiple lines of business or subsidiaries. For this reason, a disinterested third-party specialist research firm may be utilized to analyze individual companies and make such determinations—examples of such data analytic firms include Institutional Shareholder Services Inc. and MSCI ESG Research LLC. The process isn’t as simple as it might appear.

There is no shortage of additional topics to cover. In my next post, I’ll address some common misperceptions about sustainable investing, including performance. Until then, I hope this blog serves as a useful introduction to sustainable investing and how it can be implemented.
Results are from a survey conducted by SEI in late 2020, in which nearly 800 Registered Investment Advisors answered questions about sustainable investing. For the purposes of this survey, sustainable investing was defined as the alignment of investment objectives with social and/or environmental considerations. Approaches to sustainable investing may include exclusions/negative screening, environmental, social and governance (ESG) integration, and impact investing.

Environmental, social and governance (ESG) guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider ESG guidelines when making investment decisions. 

ESG and Sustainability are not uniformly defined across the industry.

Please note: A third-party investment screen vendor can vary from any other screening vendor and/or financial advisor with respect to its methodology for constructing screens, including the factors and data that are collected and applied as part of the process. As a result, screens may differ from or contradict the conclusions reached by other ESG vendors and/or financial advisors with respect to the same issuers. A selection of a screen will likely contribute to performance deviations from an original strategy. A screen may consist of factors that further define the universe of issuers subject to the screen, including factors related to revenue, ESG scoring, and the nexus to the screened sector or activity. For instance, a screen may only apply to issuers that (i) generate a certain level of revenue from the screened sector; or (ii) represent the lowest scoring companies in a particular sector (i.e. the bottom 5%). 

Investing involves risk including possible loss of principal. There can be no guarantee that risk can be managed successfully.


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