Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

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Daniel P. Nielsen
Managing Director – Head of ESG and Responsible Investing and Senior Portfolio Specialist
Great Lakes Advisors

Investing is personal. It concerns the legacy you leave behind to those you care for most. But its implications are broader than dollars and cents. How investment returns are generated can be an important part of one’s legacy as well. The investment discipline that considers environmental, social, and corporate governance criteria to generate long-term competitive financial returns and positive societal impact is known as sustainable, responsible investing (SRI). SRI is no longer a small niche within the investment industry. At the end of 2013, nearly 17% of all professionally managed assets in the U.S. incorporated one or more sustainable or responsible investment strategies.1 Globally, that figure is 30.2%, representing $21.4 trillion.2

SRI takes a number of forms. Some investors may wish to avoid returns generated by activities they object to, such as nuclear weapons or pornography. This is realized through a process commonly referred to as negative screening. Other investors may wish to make investments that generate social or environmental returns in addition to market-rate financial returns. These are typically called impact investments. Finally, some investors may be indifferent as to how profits are generated or whether social or environmental returns are considered, but believe that how companies manage their environmental, social, and governance (ESG) risks and performance impacts shareholder value such that sustainable companies will outperform their peers. This is often called ESG integration.

For many investors considering applying negative screening to their portfolios, the first question called to mind is the extent to which returns will be sacrificed. The concern is how much it will cost to make investments in alignment with one’s values. The answer, borne out by a preponderance of academic research and the performance track records of numerous SRI funds, is that it is possible to achieve market-rate returns while avoiding objectionable corporate activities or products. There need not be a performance cost. In fact, a 2012 meta-study of more than 100 academic studies produced by Deutsche Bank reported that 88% of the studies concluded negative screening has a neutral impact or results were mixed.3 A thoughtful manager who implements a targeted set of investment screens can still achieve his/her return objectives.

Beyond negative screening, an increasing number of people are seeking out impact investment opportunities intended to produce both financial returns and social or environmental benefit. These can include community investments intended to increase the availability of affordable housing, private equity investments in start-up firms creating new technologies to assist healthcare workers in developing countries, or a fund targeting the expansion of renewable energy solutions. Some impact investments are concessionary, but many seek to achieve market-rate returns.

Finally, there is ESG integration which entails investing in companies with better environmental, social, and governance policies, practices, and performance. Some investors pursue this form of SRI because they seek a more responsible portfolio in alignment with their values. Others believe that a more responsible portfolio will generate better risk-adjusted returns. This thesis is supported by numerous academic studies. In 2014, Arabesque Partners and the University of Oxford published a meta-study that evaluated more than 190 separate studies. Its findings: companies with better ESG practices have a lower cost of capital, better operational performance, and better stock price performance.4

Regardless of whether you wish to avoid objectionable corporate activities, pursue positive environmental and social impacts, or seek a more sustainable and responsible portfolio, incorporating one’s values into investments can set an important example for those you care about. To learn more about sustainable and responsible investing, speak with a Wintrust Wealth Management professional.

 

1. U.S. Sustainable, Responsible, and Impact Investing Trends 2014, U.S. SIF Foundation, 2014.
2. 2014 Global Sustainable Investment Review, Global Sustainable Investment Alliance, 2015.
3. Sustainable Investing – Establishing Long-Term Value and Performance, Deutsche Bank Group, June 2012.
4. From the Stockholder to the Stakeholder – How Sustainability Can Drive Financial Outperformance, University of Oxford and Arabesque Partners, 2014.