Sustainable investing has become a mainstream strategy, with its current market size totaling $8.72 trillion, or 20% of all funds under professional management.1 Despite its growth, sustainable investing remains misunderstood, as the term includes multiple approaches and strategies.
Socially responsible investing (SRI) was the first phase of sustainable investing, emerging in the 1970s. In this approach, investors screen out stocks incompatible with their personal values. SRI gained prominence in the 1980s as investors pressured South Africa to end apartheid.
Such negative screening identifies problematic investments but also includes drawbacks, according to Sharon French, Head of Beta Solutions at OppenheimerFunds. For example, investors who avoid a company’s shares can’t vote as shareholders to influence the business. Yet, negative screening is a clear-cut, rules-based approach and easy to adopt for a portfolio. SRI remains popular with some values-focused investors. For instance, religious-values funds may screen out companies that manufacture alcohol.
Impact investing is another approach to sustainable investing. Impact investors explicitly seek opportunities that can create social or environmental change with both measurable benefits and positive financial returns. Examples include buying “green bonds” to fund specific environmental projects, or lending to a company that delivers high-quality health care to low- income patients and tracks its results. Impact investing’s differentiators are intentionality, measurement of impact, and ongoing portfolio management toward specific outcomes.
In contrast to the first approach of negative screening which is exclusionary, environmental, social and governance (ESG) integration is inclusionary. Investors combine financial analysis with a search for companies that incorporate ESG policies in their business. These policies cover a wide range, from a manufacturer dedicated to lowering material waste, to a tech company that champions employee health and safety.
The ESG approach isn’t just about doing good—it's about doing well. Investors don’t sacrifice returns to align their values and financial goals, and studies have shown that companies with high ESG scores can outperform their peers as investments.
There are multiple strategies to manage ESG portfolios, like single themes (clean energy) or overweighting a portfolio in favor of highly-rated ESG companies. OppenheimerFunds selects holdings for its U.S. and Global ESG Revenue ETFs by combining the firm’s proprietary revenue-weighting methodology with a company’s ESG ratings. This smart beta approach helps identify companies with both high ESG scores and attractive valuations, says French.
While each sustainable approach is distinct, considering material ESG factors helps to evaluate a company's efficiency, productivity of management teams, and its risk management. "The outcome is a sustainable portfolio with top rated companies that tend to outperform and better manage their underlying risks that directly impact their business activities in the short, medium and long term," says French. This view of sustainability is a long-held tenet of OppenheimerFunds' investments.
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- ^ Source: US SIF Foundation. “2016 Report on US Sustainable, Responsible and Impact Investing Trends Executive Summary.” http://www.ussif.org/files/SIF_Trends_16_Executive_Summary(1).pdf
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Mutual funds and exchange-traded funds are subject to market risk and volatility. Shares may gain or lose value.
The stocks of companies with favorable ESG practices may underperform the stock market as a whole. Fund returns may not match the return of its respective index, known as non-correlation risk, due to operating expenses incurred by the Fund. The alternate weighting approach employed by the Fund (i.e., using revenues as a weighting measure), while designed to enhance potential returns, may not produce the desired results. Because the Fund is rebalanced quarterly, portfolio turnover may exceed 100%. The greater the portfolio turnover, the greater the transaction costs, which could have an adverse effect on Fund performance.
These views represent the opinions of the portfolio managers at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.