Investment News & Views

Sustainable Investing

Sustainable investing is an investment approach that considers environmental, social and governance (ESG) factors in portfolio selection and management. This type of investing is growing rapidly. According to Morningstar, the number of ESG funds at the end of 2018 was 50% greater than a year before, attracting nearly US$5.5 billion in net flows. The Global Sustainable Investment Alliance estimated1 worldwide assets under management in sustainable investment strategies at the beginning of 2018 at $30.7 trillion.

Why is sustainable investing on the rise? One explanation is that many investors, particularly younger investors, believe it’s important that their investments are closely aligned with their values. The issues most relevant to the three core themes of sustainable investment include:

Environment:

  • Climate change impact
  • Air & water pollution
  • Waste management
  • Energy efficiency
  • Water scarcity

Social

  • Human rights
  • Consumer privacy
  • Gender equality
  • Data security
  • Health & safety

Governance

  • Board structure
  • Company ownership
  • Financial reporting
  • Business ethics & culture
  • Executive remuneration

Companies that meet good ESG criteria such as working towards zero-carbon emissions or working with suppliers to improve the rights and pay of workers are likely to have a more sustainable business model and therefore will be rewarded with a higher share price. Another argument in favour of sustainable investing is that these companies are less exposed to political and legal risk. It’s possible that in future years carbon stocks will face increased taxation and regulation and more lawsuits. In avoiding them, sustainable investors are reducing this risk. They might also benefit from being early investors in green stocks, in the same way that it’s profitable to be at the start of any trend. Hence sustainable investing is about choosing companies with good prospects meaning there should be no long-term trade-off between principled investing and return. There is growing evidence to support this. For example, a study by Khan et al2 of Harvard University found that companies with good ratings on sustainability issues most relevant to their industries, significantly outperformed companies with poor ratings on these issues.

Sustainable investing differs from the old approach of ethical investing where investors avoided companies or industries that have a negative impact on society and the environment. This is called negative screening and led to the avoidance of ‘sin’ sectors such as tobacco, animal testing, weapons production, gambling and oil & gas. There is evidence to suggest that negative screens may come at a cost. For example, tobacco firm Altria Group, formerly known as Philip Morris, was the best performing stock in the S&P 500 between 1925 and 2003. Similarly, the Vice Fund, formerly known as the Barrier Fund, invests in gaming, tobacco, alcoholic beverages, and aerospace and defence stocks, all of which are industries some consider “vices.” As of June 2017, the Vice Fund underperformed by 1.4% per year during the previous five years but has outperformed by 1.3% annualized since the inception of the strategy in 2002. Further evidence suggests that relying on negative screening to build a values-aligned portfolio could potentially lead to below-market returns. According to an article by Pieter Jan Trinks and Bert Scholten in the Journal of Business Ethics3, there are significant opportunity costs associated with negative screening.

Greenpath portfolios mainly use funds and ETFs constructed using a sustainable approach to investing based on the application of ESG principles to stock or bond selection. For example, the Stewart Investors Worldwide Sustainability Fund has the objective of investing in ‘companies which are positioned to benefit from, and contribute to, the sustainable development of countries in which they operate.

1. Global Sustainable Investment Alliance ‘Global sustainable investment review 2018’ (2019)
http://www.gsi-alliance.org/wp-content/uploads/2019/06/GSIR_Review2018F.pdf

2. Mozaffar Khan, George Serafeim, and Aaron Yoon ‘Corporate Sustainability: First Evidence on Materiality’ (2016), SSRN
https://www.sustainablefinance.ch/upload/cms/user/CorporateSustainability_Firstevidenceonmateriality_Khan_Serafeim_Yoon_February2015.pdf

3. Pieter Jan Trinks and Bert Scholten ‘The Opportunity Cost of Negative Screening in Socially Responsible Investing’, Journal of Business Ethics (2017)
https://link.springer.com/article/10.1007/s10551-015-2684-3

  • Tuesday, November 5, 2019

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Investment Officer

Mike chairs Crossing Point’s Investment Management Committee and holds the CII Certificate in Discretionary Investment Management.