Once thought of as a niche strategy, sustainable and impact investing (SII), which incorporates environmental, social, and governance (ESG) factors in the investment process, has taken root throughout the investment industry. In the U.S., $12 trillion is now thought to be managed with some form of sustainable strategy in mind. That is nearly double the amount invested with ESG considerations in 2014—and if true, represents roughly 25% of all managed assets in the U.S. This trend is even more pronounced globally; half or more of all investments in Europe, Canada, Australia, and New Zealand incorporate some ESG factors.
SII strategies are incorporated in multiple asset classes, including, most notably, large cap equity and fixed income. SII also encompasses a variety of strategies that go by other names but fall under the broad SII umbrella, such as ESG, socially responsible investing (SRI), green investing, ethical investing, and values-based investing.
No matter what term is used to describe SII, it is important to understand that SII is evolving and continues to be refined. Because of differing historic approaches, there are differing results. Not surprisingly, there are studies indicating that companies embracing good governance tend to enjoy, on average, stronger reputations, lower costs of capital, and higher-quality balance sheets. Moreover, SII strategies appear to reduce the “contingent liability” that comes with ignoring the pillars of good corporate behavior.
However, there is academic debate as to whether ESG adoption enhances or detracts from long-term investment performance—or if these factors are largely neutral when it comes to generating benchmark-beating returns. Consequently, many individuals, families, and foundations are exploring this incrementally. A survey by Spectrem Group found that among high-net-worth investors—many of whom have embraced socially responsible investing—fewer than 15% expose more than a quarter of their portfolios to these strategies.
At Fiduciary Trust, we believe that analyzing ESG data, in conjunction with traditional financial criteria, can enhance investment decision making, regardless of whether positive ESG performance is a key investment objective. In addition, with an increased focus on ESG factors across global investment markets, there is an expanding range of investment opportunities with favorable ESG ratings which reduces the need to make tradeoffs between SII and return.
Given our ESG beliefs combined with our client-customized approach to investment management, Fiduciary Trust’s investment offering covers a range of ESG options, as illustrated below.
For those clients who want to take a more proactive approach to ESG, our “ESG Focus” offering has been enhanced. For these clients, we generally recommend our “ESG Core” program which maintains broad diversification across asset classes while focusing on investments with high ESG ratings. This enables individuals and trusts to pursue a “pro-ESG” strategy while seeking to maintain performance in line with traditional benchmarks.
For clients who invest in individual U.S. equities, we also offer an ESG-focused proxy voting service. When there are ESG-related issues that arise in shareholder votes, a client’s shares are voted using a pro-ESG lens. Finally, Fiduciary also offers specific approaches to SII, such as funds that focus on social or environmental objectives in addition to financial returns, or shareholder activist funds that seek to exert strong influence on corporate boards to pursue positive ESG policies.
Looking to the Future
Interest in Sustainable and Impact Investing strategies has been growing at a brisk pace in the asset-management industry. The availability of ESG information to inform investment decisions has advanced significantly as well, although there are still a number of limitations. The increased ESG focus is leading a large and growing number of companies to enhance their ESG performance, which, overall, benefits both ESG and non-ESG focused investors.
If you are interested in taking a more proactive approach to SII, a Fiduciary Trust Investment Officer can help you determine which SII strategy could be most effective at meeting your goals in the context of your overall wealth plan.
Issue Date: January 2, 2020
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The opinions expressed in this article are as of the date issued and subject to change at any time. Nothing contained herein is intended to constitute investment, legal, tax or accounting advice, and clients should discuss any proposed arrangement or transaction with their investment, legal or tax advisers.