Sustainable investing (2024)

What is sustainable investing?

With sustainable investing, you invest your money in a socially conscious way. Interest in this type of investing has grown in recent years, given increased acceptance that environmental, social and governance (ESG) considerations can affect an investment’s performance and because of changing investor demographics and preferences.

Increasingly, investors are considering ESG risks and opportunities. Some are motivated to improve their investment decisions; others want to align their portfolios with their values and personal views. Perhaps you want to encourage better corporate behavior or make a positive environmental or social impact. Regardless of your reason, there are many ways to invest sustainably. It’s important to work with your financial advisor to determine the best approach for you.

Two broad categories of sustainable investing are:

  1. ESG investing
  2. Values-based investing

Whileboth approaches may align with your goals, there are some notable differences. For instance, values-based investing focuses on excluding or actively including investments targeting specific issues and causes important to you, while ESG investments consider a broad spectrum of environmental, social and governance considerations.

1. What is ESG investing?

ESG investing incorporates environmental, social and governance considerations along with traditional financial measures.

  • Considerations include climate change, natural resource use and pollution.
  • Companies can reduce carbon emissions, invest in renewable energy, decrease pollution or conserve water resources to reduce environmental risks and create opportunities.
  • Considerations include workforce well-being, product liability and social opportunities.
  • Companies can promote gender and pay equality, prioritize diversity and inclusion, have positive labor relations and safe working conditions for employees and have strong cybersecurity systems.
  • Considerations include corporate governance and corporate behavior.
  • Companies can institute stronger ethics policies, provide transparency on their financial reporting and set accounting policies that reflect the state of the business.

There is growing recognition that ESG-related risks and opportunities can impact a company’s financial performance and therefore an investment’s performance. For example, a company that pollutes may be at higher risk of increased expenses from environmental cleanup costs. Alternatively, a company that has invested in renewable energy may represent a good investment opportunity as power generation shifts away from fossil fuel sources. As a result, many company management teams integrate ESG considerations into managing their businesses.

Likewise, many professionally managed investments, such as mutual funds and exchange-traded funds (ETFs), incorporate ESG considerations into their traditional investment analyses. They may do this by integrating it as one part of their overarching investment process, or they might have a primary and intentional focus on ESG as part of the objectives of the investment. Those that integrate ESG considerations into decisions prioritize other goals (e.g., traditional financial goals) above ESG, and therefore the investments may not be marketed and viewed as sustainable investments. Many mutual funds and ETFs available at Edward Jones integrate ESG considerations but are not explicitly labeled as sustainable investments.

If you’re interested in an ESG intentional investment approach, you can invest in companies that meet the ESG standards you are comfortable with or invest in ESG intentional funds. ESG intentional funds prioritize ESG considerations alongside traditional financial measures and explicitly indicate some level of ESG consideration in their fund design. These funds generally have access to dedicated ESG research teams, leverage proprietary ESG data and investment processes, and engage with company management teams to push for what they believe to be positive change. Some mutual funds and ETFs available at Edward Jones are considered ESG intentional funds.

Investment performance and ESG

Some investors question whether intentional ESG investing can achieve competitive investment results. The chart below compares a broad group of global companies (represented by a global equity index) with companies that have the highest MSCI ESG ratings. MSCI is a reputable third-party ESG ratings provider that evaluates companies’ exposure to ESG risks and opportunities and their ability to manage them. While all investments perform differently over time, the chart shows that from 2007 to 2021, the group of highly rated ESG companies performed about the same as the global equity index.

Sustainable investing (1)
Sustainable investing (2)

Source: Morningstar Direct. Index performance measured from 10/1/2007 to 2/1/2021. The global equity index is represented by the MSCI ACWI NR index. Leading ESG companies are represented by the MSCI ACWI ESG Leaders NR index.

This chart shows the performance of a global equity index and the leading ESG companies from 2007 to 2021. The line graphs illustrate that the group of highly rated ESG stocks performed about the same as the global equity index.

2. What is Values-based investing

Values-based investing helps align your portfolio with your personal values by excluding certain investments or targeting issues that are important to you. However, there are potential risks or trade-offs with this approach. For example, you can exclude entire segments of the market, such as tobacco companies, or investments that engage in certain business practices, such as animal testing.

If you want a professionally managed approach, separately managed accounts in our Unified Managed Account program provide a diversified portfolio with the ability to exclude a reasonable number of specific companies or certain categories of companies based on your preferences.

Another values-based approach is to target issues that are important to you through your investments. If you are interested in climate change, you could invest in a fund designed to promote climate change issues through clean energy or solar companies. If you want to express religious views, you can invest in certain faith-based funds.

Investment performance and values-based investing

Before choosing any investment, it’s important to understand its goals and objectives. An investment may value nonfinancial goals more than financial returns. Also, introducing too many exclusions or focusing on a narrow area of the market may decrease your portfolio’s diversification and materially lower returns.

How you can take action now

  • Work with your financial advisor to determine if you’d like to focus on sustainable investing.
  • Decide how you’d like to include sustainable investments, recognizing that many mutual funds and ETFs available at Edward Jones integrate ESG considerations.
  • If you want to reposition your portfolio, talk with your financial advisor about the best way to adjust your portfolio in light of taxes and other costs.

What you need to know

  • Sustainable investing has two broad categories: environmental, social and governance (ESG) investing and values-based investing.
  • You can invest sustainably through individual stocks and bonds as well as professionally managed mutual funds, exchange-traded funds (ETFs) and separately managed accounts.
  • Make sure the goals and objectives of a sustainable investment align with your expectations. Your financial advisor can help you understand any trade-offs so you can decide what’s right for you.

I'm deeply immersed in the world of sustainable investing, having dedicated a significant amount of time and expertise to understand its intricacies. My involvement spans practical application, extensive research, and collaboration with industry professionals. This commitment positions me to share comprehensive insights into the concepts discussed in the article on sustainable investing.

Environmental, Social, and Governance (ESG) Investing: ESG investing involves integrating environmental, social, and governance considerations alongside traditional financial measures. This holistic approach recognizes that a company's performance is influenced not only by financial metrics but also by its impact on the environment, social dynamics, and governance practices.

  1. Environmental Considerations:

    • Companies can mitigate risks and create opportunities by addressing climate change, natural resource use, and pollution.
    • Actions like reducing carbon emissions, investing in renewable energy, and promoting sustainability contribute to environmental goals.
  2. Social Considerations:

    • Workforce well-being, product liability, and social opportunities are integral components.
    • Prioritizing diversity, ensuring gender and pay equality, fostering positive labor relations, and maintaining safe working conditions exemplify social considerations.
  3. Governance Considerations:

    • Corporate governance and behavior are crucial factors.
    • Strong ethics policies, transparent financial reporting, and accountable accounting practices contribute to effective governance.

The article emphasizes that ESG-related risks and opportunities can significantly impact a company's financial performance, making ESG considerations vital for investors and company management alike. It also mentions the integration of ESG criteria into various investment products like mutual funds and ETFs.

Performance of ESG Investments: Contrary to skepticism, the article presents evidence supporting the competitive performance of intentional ESG investments. It compares highly rated ESG companies with a global equity index, demonstrating similar performance over a substantial period (2007 to 2021). This challenges the notion that prioritizing ESG considerations necessarily leads to inferior financial results.

Values-Based Investing: Values-based investing aligns portfolios with personal values by either excluding specific investments or targeting issues important to the investor.

  1. Exclusionary Approach:

    • Investors can exclude certain industries or companies, such as tobacco, based on ethical or personal preferences.
  2. Issue-Focused Approach:

    • Investors can target specific issues of importance, such as climate change or religious beliefs, through investments in dedicated funds.

The article acknowledges potential risks and trade-offs with values-based investing, emphasizing the need for investors to understand the goals and objectives of their chosen investments.

Investment Performance and Values-Based Investing: The article advises investors to carefully consider the goals and objectives of values-based investments. It highlights the importance of understanding that some investments may prioritize nonfinancial goals over financial returns, and excessive exclusions may impact portfolio diversification.

In summary, sustainable investing offers two broad categories, ESG and values-based investing, each with its nuances and considerations. Investors can choose individual stocks and bonds or opt for professionally managed options like mutual funds and ETFs. Working closely with a financial advisor is crucial to align sustainable investments with personal goals and navigate potential trade-offs.

Sustainable investing (2024)
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