Investing sustainably: Old becomes new

While it may have been a new trend several years ago, sustainability now is well ingrained in the investment mindset. For affluent investors dedicated to charitable use of their wealth, sustainable investing offers another way to voice their personal values.

Investors are keenly aware of issues surrounding a company’s “ESG” (Environmental, Social, Governance) metrics. These days, you would be hardpressed to find an adviser or investor who doesn’t take into account the track record of a company’s environmental standards (its policy with regard to emissions, dumping, or energy usage, for instance, or how it treats animals), its social values (how the company gives back to its community, its working conditions, or whether it employs an equal number of men and women) and its governance metrics (the composition of its board of directors, the transparency of its policies, accounting and compensation structures, etc.).

Such socially responsible impact investing, or investing that considers ESG criteria, historically has been associated with “screening out” industries that some might consider “morally objectionable.”

Some individuals object to companies, for example, that rely on child labor. And, many investors have come to learn that weak ESG principles may be indicative of broader problems within a company.

The evolution of investors’ values impacting their investment decisions has become mainstream, seeping from the millennial cohort through to all age groups of investors. Among millennials the practice is staunch: for instance, 75 percent of millennial investors believe their investments can influence climate change, and 90 percent want sustainable investing options as part of their 401(k) plans, according to a survey by the Institute for Sustainable Investing.

But I see the drive toward embracing the ESG imperative is escalating beyond just millennials, especially as studies have come to show that organizations with a strong stance on sustainability may even show higher returns.

While investors once were concerned about the profitability of sustainable investing, investment return data has since dispelled the assumption that sustainability sacrifices the bottom line. Sustainable companies have proven to be competitive, and the investment arena more and more considers environmental, social and governance criteria as essential components of financial analysis.

More and more, individual and institutional investors are influencing companies’ behavior and, in some cases, even propelling errant companies in the direction of sustainable development.

From an adviser’s point of view, the benefit of investing according to personal values is threefold.

First, the returns may be competitive, or even better: clients can advocate through their investments without compromising their financial goals and objectives.

Second, a portfolio can help make a difference communally and globally. Investments can help promote human rights and social justice. And they can send a message by identifying which practices are collectively considered unacceptable.

Third, clients who align their portfolios with their personal values tend to be more engaged, which leads to more consistent dialogue and enables individuals and their advisers to construct more suitable portfolios.

Conversations around “sustainable investing” have become the norm and often are accompanied with a greater sense of urgency, as investors are incorporating more in their own research than simple performance, market outlooks and industry prospects.

In a rapidly changing financial landscape, impact investing is a critical tool to consider to help navigate the future.

Joseph Matthews is a Financial Advisor with the Wealth Management Division of Morgan Stanley in Fairfield. He can be reached at 203-319-5165 or by email at joseph.matthews@morganstanley.com. Follow Joe on Twitter @jmatthewsMS.