Socially conscious investing has gone mainstream. Many people now factor environmental, social and corporate governance criteria—the triumvirate that define so-called sustainable investing—into their portfolio decisions. And they’re not all millennial tree huggers.
Schroders, a worldwide investment firm, reports that over the past five years, 70% of U.S. investors have increased their allocation to ESG investments. Some have deep pockets. In 2018, 43% of U.S. institutional investors—endowments, foundations and pension plans—incorporated ESG factors into their decision-making process, nearly twice the percentage in 2013. Part of the reason: A growing body of evidence shows that investors don’t have to give up returns to invest sustainably.
Naturally, investment firms are answering the call with new products. More than 170 sustainable investing funds have debuted over the past five years, along with apps that promise to align your portfolio and your values. In June, for example, Newday Investing launched an app through which investors can access proprietary stock portfolios tailored to six themes, including climate change and gender equality. “Every type of investor, from the largest pension funds to individual investors, is expressing significant interest in responsible investing,” says John Streur, head of Calvert Research and Management, one of the oldest sustainable investing firms in the country.
You don’t have to be a climate-change zealot or burn with desire to save the world to benefit from this approach. Many ESG tenets make good business sense and, therefore, good investment sense. We’ll tell you what the ESG characteristics are all about and why some make a difference in company performance, as well as the best way to invest with ESG in mind.
A Long Evolution
The first socially conscious investment fund—as such funds were usually called before sustainable became the term of choice—opened in 1952. Over time, the focus has shifted from what couldn’t be included in the fund—firms that derive a majority of revenues from alcohol or tobacco, for example, or those in the gambling or nuclear power industries—to companies that are doing better than their peers when it comes to ESG criteria. “The question now is how do we differentiate how good one company is from how good another is? That’s a positive change,” says Streur.
The best ESG companies, in a nutshell, are mindful of their environmental impact; treat customers, suppliers and employees well; and are run by a diverse pool of managers who are aligned with shareholder interests. Firms that excel in these areas, ESG advocates maintain, will be more successful over the long haul than companies that don’t.
It turns out they are right. Socially responsible companies, research shows, benefit financially from their efforts. Numerous studies show that these firms exhibit enhanced operating efficiency, improved employee productivity and better risk management compared with firms that lag behind on ESG values. A 2011 Harvard Business School study, for instance, found that from 1993 to 2010, a portfolio of 90 companies with a high quotient of sustainability characteristics outperformed a portfolio of 90 low-sustainability companies. The high-sustainability portfolio was worth 22% more at the end of the 18-year period. “ESG factors matter,” says Calvert’s Streur.