The Drivers and Challenges of Sustainable Investing
The push for sustainability is a significant, durable global trend with important implications for investors. At the same time, sustainable investing is a highly nuanced space lacking clear definitions and easy answers. There are many ways investors can engage with sustainability, each with its own implications and potential outcomes.

The bottom line: Asset management firms with an eye toward the future are increasingly recognizing the sustainable investing trend, grappling with its complexities, and determining how and where to implement it in portfolios.

4 Drivers of Sustainability

We define sustainability as economic and financial growth that is socially conscious and environmentally aware, supported by inclusive and transparent governance at all levels. Compared with the past, we’re seeing a broad push for sustainability in our economy today, supported by four key growth areas, each of which is accelerating in size and scope. Exhibit 1

The Drivers and Challenges of Sustainable Investing

Consider a few statistics that illustrate the trend:

  • Public Policy: In 2015, all 195 governments of the world signed the Paris Climate Agreement, which seeks to reduce carbon emissions to near zero in the next 50 years.
  • Business Sector Leadership: In 2017, 85% of companies in the S&P 500 Index published sustainability reports, up from 20% in 2011.1
  • Technological Improvements: Between 2000 and 2016, the cost of a solar installation dropped an average of 7% per year for residential and small non-residential systems, and as much as 11% per year for large non-residential systems.2
  • Changing Social Paradigms: A recent study found that 73% of Millennials are willing to spend more on a product if it comes from a sustainable brand.3

This broad, growing support suggests a high likelihood that the demand for sustainability will only deepen in the years to come.

Practical Implementation Challenges

Despite the growing support for sustainability, practical implementation challenges prevent some investors and advisors from embracing ESG and impact investing in their portfolios. These nuances are integral to the conversation about the role of sustainable investing in the asset management industry today.

1. What to Call It?

Acronyms abound that describe sustainable investing – ESG, SRI, CSR, and RI, among others – and can make it hard for investors to understand and access this space. Discussions of sustainable investing generally refer to one of three categories of approaches:

  • Values-based investing: These approaches exclude certain sectors, such as tobacco, coal, and firearms, to align a portfolio with an investor’s values.
  • ESG integration: These approaches intentionally integrate environmental, social, and governance data considerations into investment and, importantly, proxy voting and shareholder engagement decisions.
  • Impact investing: These strategies allocate capital with a dual purpose of seeking financial returns and positive social and environmental outcomes.

2. Sifting Through the Data

The last 10 years have seen a surge in environmental, social, and governance data disclosure from corporations. While this growth is a welcome development, the ESG data available today lacks standardization in reporting and methodology. There are currently more than 115 ESG data providers, each with a unique methodology. This rapidly evolving space is likely to mature during the next decade. For now, investors must adopt a proactive approach to find a data set that is replicable and actionable to their approach.

3. Combatting Performance Myths

There is a longstanding debate about whether adopting a sustainable investing approach will cost an investor returns. Recent studies, however, have demonstrated a clear, non-negative relationship between ESG performance and corporate financial performance. In fact, a March 2018 study from UN PRI and MSCI shows that portfolios optimized around ESG momentum (i.e., an improvement in ESG scores) and ESG tilt (i.e., a best-in-class approach) would have led to 18% and 10%, respectively, of cumulative outperformance in the 10-year period ending June 2017. Exhibit 2

The Drivers and Challenges of Sustainable Investing

4. A Growth Opportunity

Roughly $8.7 trillion – or 21% of all managed assets in the United States – has some element of ESG consideration as part of the process, an amount that tripled between 2012 and 2016.4 In comparison with Europe, where more than 50% of all managed assets have a sustainable investing element, the United States has significant room for growth. 

Institutional investors have largely driven the growth in sustainable investing to date, but individual investors – particularly Millennials and women – are becoming more attuned to the availability and potential benefits of these investment approaches. This represents an opportunity for financial advisors with an understanding of the space to provide guidance to clients looking to align their portfolios more closely with their values.

Read the white paper, Drivers and Detours on the Road to a Sustainable Future, for more on the growth and nuances of sustainable investing.


 
  1. ^Governance & Accountability Institution, Inc. 2018 Research – www.ga-institute.org
  2. ^Lawrence Berkeley National Laboratory and the U.S. Department of Energy, Tracking the Sun 10, September 2017.
  3. ^Nielsen, The Sustainability Imperative, October 2015.
  4. ^Source: US SIF, as of December 2016.