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Written by: Ali Caffery | Envestnet | PMC
Sustainability has become an important word in the corporate lexicon in the last few years. Corporations have invested billions of dollars to make products ranging from Hershey’s Kisses to Starbucks Coffee to Taylor Guitars from sustainable resources. This movement is also being driven by the fact that it can be good for the bottom line, not to mention in line with consumer demand.
The same is true for sustainable and impact investing. According to Morningstar, assets under management in portfolios utilizing sustainability as one of the metrics in investment selection have grown to an estimated $23 trillion globally, a figure representing a 600% increase over the past decade, with more than a third of that amount in the US alone 1 . But, the astonishing growth in impact investing might never have happened without Earth Day.
The first Earth Day in 1970 was a series of events held in major cities and college campuses across America. More than a million people participated and it sparked a rise in consciousness that made recycling mainstream, helped reduce pollution and spurred regulations that brought about a resurgence of formerly endangered species, like the bald eagle.
It’s expected that this year on April 22 close to a billion people in 174 countries took part in Earth Day activities. From a nationwide teach-in 48 years ago, Earth Day has grown into a global movement that recognizes that the survival of the human race depends on our stewardship of the planet. It’s also helped people realize that their actions, purchase decisions and even how they invest can make a difference.
That “we are the world” attitude has already carried over into the world of investing . Environmental awareness has made a growing number of consumers become more politically motivated and increasingly interested in aligning their investment dollars with their personal beliefs by educating themselves on the environmental, social and governance (ESG) practices of the companies they invest in.
Related: 5 Impact Investing Trends That Emerged From 2017
In one study, 75% of U.S. investors noted that they have increased their sustainable investments over the past 5 years 2 . This is especially true for Millennials, which is why Earth Day presents an excellent opportunity to sit down with your clients to discuss their personal beliefs and how they can relate this to the contents of their portfolios. According to a recent Morgan Stanley Report “75% believe their investments can influence climate change and 84% say their investments can help lift people out of poverty.” 3 And what’s more, if given $1000 to invest, 86% of Millennials indicated they would invest in a company that makes the world a better place through their product 3 .
Fortunately, for advisors whose clients are interested in aligning their investments with their values, there are more sustainable and impact-oriented options than ever, as a growing number of asset managers, including some of the biggest names on Wall Street, have realized the extra level of risk protection that incorporating ESG factors into their due diligence can deliver. Morningstar has noted the launch of more than 100 new sustainable funds in the last three years—40 of them in 2017 alone. 4
While there’s a lot of interest in sustainable investing, there are also still some skeptics. The most common reason advisors give for their reluctance to consider ESG is a fear that returns will suffer as a result, although a dispassionate assessment of the data doesn’t show that to be the case. Research conducted by both Morningstar and JP Morgan found “no systematic performance penalty associated with sustainable investing and possible avenues for outperformance based on reduced risk or added alpha.” 5 The fact that more and more investment managers are incorporating ESG analysis into the investment selection process is a testament to the value it can add.
In 2016 alone, as much as 20 percent of money invested by professional investment managers in the United States was directed towards socially responsible investments (SRI) and advisors who fail to embrace this reality could be missing an important opportunity, particularly with women and Millennials, two growing investor demographics 6 . Add to that figure the realization that Millennials stand to be on the receiving end of an estimated $30 trillion in generational wealth transfer over the next few decades and it’s obvious that impact investing represents a sustainable trend that is here to stay 7 .
[1] “ Sustainable Funds U.S. Landscape Report,” Morningstar, January 20182“ Schroders Global Investor Study 2017: Sustainable investing on the rise,”Schroders, September 2017
3“ Sustainable Signals: New Data from the Individual Investor,” Morgan Stanley Institute for Sustainable Investing, August 2017
4“ What Are Sustainable Funds and How Have They Performed?,” Morningstar, January 2018
5“ Sustainable Investing Research Suggests No Performance Penalty,” Morningstar, 2016
“ ESG – Environmental,Social & Governance Investing: A Quantitative Perspective of how ESG can Enhance your Portfolio,” J.P. Morgan, 2016
6“ Report on US Sustainable, Responsible, Impact Investing Trends 2016,” US SIF Foundation, 2016
7” The “Greater” Wealth Transfer: Capitalizing on the Intergenerational Shift in Wealth,” Accenture, 2015