In 2020, my firm made the decision to go all in on sustainable investing. Sitting in my home office that year, watching crisis after crisis unfold, I thought, “What can I do?” The answer was to help our clients become more intentional about their investments.

Almost all of our clients gladly transitioned their portfolios. All prospective clients know that sustainable investing is integral to our investment philosophy. If you visit our website, you’ll see wind turbines—you know an advisory firm is serious about sustainability when instead of a lighthouse or compass imagery, you see wind turbines!

We knew that many investors were confused about what exactly sustainable investing was (and so were we). “It sounds good, but I don’t want to lose money,” our investors might think, based on the myths out there. But they were still intrigued by the opportunity it represented. So how could we square that circle?

It turns out the people we work with best are those who want to do good while making money. They want a portfolio to grow while saying something about what they believe. They ask themselves, “How can I do both?” For that answer, they come to advisors like us for guidance.

Exploring the History of SRI

I began studying for one of the lesser-known designations, the Chartered SRI Counselor^TM (CSRIC®), in 2020. I was impressed by the way the coursework got into the history and current trends of sustainable investing—formerly called socially responsible investing (SRI). I finally had the opportunity to learn the difference between SRI, ESG, and impact investing.

We define sustainable investing as any investment strategy that seeks to maximize return (first) while simultaneously advancing an ideal. Or put another way, it’s an active form of investing that incorporates additional data to help the investor make decisions.

Impact investing incorporates giving up returns for some other cause. That’s not SRI or ESG; that is impact investing (a separate topic altogether that has been politicized as of late). People often confuse it with SRI, but it is a small niche within the category and not what we do.

Environmental, social, and governance (ESG) are the underlying factors that can be tilted within SRI strategies. There are five formal methods within the ESG universe to tilt those strategies ranging from excluding companies to engaging corporations. Our firm integrates 29 ESG factors (or metrics) within one of those methods (integration) to build our client portfolios.

It’s More Than Exclusionary Screening

Some people are surprised to find the roots of sustainable investing trace back to the 18th century with the Quakers. The Quakers eventually decided not to work with organizations that participated in the slave trade.

This is the same sort of negative/exclusionary screening that became common in the 1970s. Philip Morris (tobacco/cigarettes) and Exxon (fossil fuel) were two of the most profitable companies in the world. When fund companies excluded them, it was almost guaranteed to hurt performance.

Analyzing the ESG Data

Unlike the socially responsible investing of the 1970s, today’s most popular method of SRI analysis is ESG integration. This allows investors (and advisors) to assess and analyze the entire universe of companies and funds without exclusions. Because there is no legal sustainability reporting standard in the United States, completing this version of fundamental analysis is difficult. But therein lies the alpha opportunity.

There are few finite rules for any investing strategy: just frameworks applied to an investment strategy. In that way, SRI is similar to Modern Portfolio Theory, Value/Growth Investing, Factor Analysis, Smart Beta, Momentum, and a dozen other strategies.

Major Growth and Evolution

About a third of all investing has some environmental, social, or governance factor attached to it.¹ Two of the most popular factors assessed by institutional investors are climate change and conflict risk management. We see natural disasters becoming more common as well as unnatural disasters like drastically reduced groundwater in river basins and aquifers all throughout the West Coast. It’s all too common to see war or other types of conflict with both human and economic consequences worldwide.

U.S. investors are hardly alone in their quest for economic performance that doesn’t add to societal problems. The Global Sustainable Investment Alliance incorporates EUROSIF, UKSIF, JSIF, and other regions around the world. I highly recommend curricula from the U.S. counterpart, US SIF: The Forum for Sustainable and Responsible Investment. They have CE courses, research, and the latest trends on sustainable investing across all asset classes.

At my firm, we see on the horizon even greater opportunity in this space as regulation requires that corporate reporting become more standardized. It’s one more way we as advisors can help people feel good about their money.

Sources:

1. Bloomberg. “ESG Assets May Hit $53 Trillion by 2025, a Third of Global AUM,” February 23, 2021.

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