Sustainable investing in all its forms is surging. As you can see in the chart below, over $100 billion has flowed into sustainable fund strategies over the past few years, with more than $50 billion added just in 2020. It is a staggering amount, with momentum continuing to overcome pandemic headwinds.
Investor interest is building exponentially.
The appetite for investments that integrate Environmental, Social and Governance (ESG) guidelines and sustainable principles with the potential to change the world is broad-based. Interest in climate change and concerns about the global pandemic continue to bring ESG-related issues to the forefront. Research data show that sustainable investing is gaining momentum across all individual investor demographic groups and, to an even greater extent, institutional investors.
As is stands today, “sustainable investing” is an umbrella term that covers three broad categories: Socially Responsible Investing (SRI), an exclusionary approach; Thematic Impact investing (TI), an inclusionary approach; and Environmental, Social and Governance investing (ESG), an approach that mitigates a broad array of risks.
Investor interest is building exponentially in each of these areas for different reasons.
- Values: Many investors want to align their capital with their values. Often, the way to do this is through exclusions of specific businesses or business practices, which is referred to as SRI. We are in an unprecedented period of significant environmental and social challenges, which is why investors have been catalyzed to remove bad actors from their portfolios.
- Impact: Beyond values alignment, investors are increasingly looking to make some positive impact with their capital. In public markets, impact is often generated through thematic investing, or the targeting of specific types of businesses within a portfolio. Top of mind for investors these days are companies with products, services or business practices focused on addressing environmental challenges such as climate change or social issues such as diversity and justice.
- Outcomes: Thinking bigger picture, investors are increasingly realizing that thoughtful integration of ESG analysis in an investment process can not only help manage risk, but also broadly incentivize better corporate behavior. Data and analytics have enabled this more robust framework for investing and academic research increasingly shows the potential for better risk-adjusted returns (Source: Brookings Institution; Center for Effective Public Management: Turning a Profit While Doing Good: Aligning Sustainability with Corporate Performance).
Sustainable investing is just smart investing.
With rapid growth, there can sometimes be some resulting confusion in a hyper-dynamic marketplace. Increasingly, investors are wondering how to navigate this landscape and ensure their portfolios meet both sustainability and financial objectives.
F.L.Putnam was an early adopter of sustainable investing principles. We have been practicing SRI/ESG on behalf of our clients since the firm’s inception in 1983. ESG data and analysis is fully integrated into our investment process. By avoiding exposure to controversy and researching companies whose products or services address pressing social or environmental issues, our portfolios are designed to improve risk-adjusted returns.
CFA Institute Spotlight on Sustainable Investing with recognized industry expert, Andrew Wetzel:
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