If you want to benefit society through your investments, does it mean you have to leave potential returns on table?
This question is being hotly debated across the financial services industry thanks to growing interest in impact investing as well as the rise of funds that invest in companies with strong environmental, social and governance (ESG) practices. Wealthy Millennials, in particular, are a key reason why this question is suddenly top-of-mind for advisors.
With the largest intergenerational wealth transfer in American history underway1, our research shows that the next generation of high-net-worth investors is looking to advisors for ideas on how to have a measurable impact on society while earning sustainable returns. These investors, who were born between 1980 and 1995, are keenly focused on improving access to basic human rights like education, gender equality and clean water through their investment portfolios2.
But even as interest in impact and ESG investing grows, I continue to hear that you cannot have a positive impact on society without sacrificing returns.
Much of this thinking is rooted in the old-school approach to socially responsible investing (SRI), which came of age in the 1980s. Back then, SRI meant screening out companies whose values and business practices weren’t aligned with your own. For instance, if animal rights happened to be one of your concerns, perhaps you avoided investments in pharmaceutical companies that conducted animal testing. For decades, this approach led many investors to avoid buying funds that invested in tobacco, alcohol, pharmaceutical, healthcare, and energy companies.
The old style of SRI ultimately required investors to screen out wide swaths of the investible opportunities. Many of the companies that SRI avoided were industry leaders, meaning that they did in fact give up returns. But under the current approach to sustainable investing – an umbrella term that includes SRI, impact and ESG investing – investors no longer have to take such a drastic step thanks to the rise of Big Data.
How Big Data Transformed Sustainable Investing
Whether you realize it or not, Big Data has transformed many different aspects of our lives. For example, global positioning systems like Waze leverage Big Data to help us avoid traffic and get to our destinations as quickly as possible. Wearable technologies like Fitbit use it to help us improve our health. Music streaming services mine Big Data to provide us with playlists that are in tune with our musical tastes. The list goes on and on.
Big Data is also enabling people to align their investments with the causes they care about. We’re now able to use powerful analytics to screen companies on many different levels across all industries. Today, instead of saying, ’I’m not going to buy any energy companies,’ you have the ability to harness the power of Big Data to identify leaders in the industry who are respectful of their employees, community and the environment.
In an effort to help advisors find solutions that are aligned with their clients’ interests, we recently launched a pair of ESG strategies. In doing so, we partnered with two industry-leading analytics firms—MSCI (leveraging their MSCI ESG Ratings unit) and Sustainalytics – to help us identify the top U.S. and global companies with the strongest ESG practices.
These analytics firms have the Big Data power to examine a company top to bottom and evaluate roughly 100 variables that explain what a company stands for socially, environmentally and in terms of their corporate governance. With U.S. companies, for example, Sustainalytics uses the S&P 500 Index as its universe. The top 50% of that universe is selected by relative ESG score, which is calculated by Sustainalytics. It then eliminates companies with ESG controversies that fall into Category 4 or higher, with 5 being the highest. MSCI ESG Ratings takes a similar approach for global companies.
How Sustainable Investing Portfolios Perform
But let’s go back to our original question. Are investors leaving potential returns on the table by focusing on companies that are having a positive impact on society? Under the new, data-driven approach to sustainable investing, the answer is no. A 2015 report co-authored by the University of Oxford and Arabesque Partners even goes a step further, arguing that sustainable investing strategies may actually offer investors potential for superior risk-adjusted returns3.
In conducting the research, Oxford and Arabesque examined over 200 academic studies and sources on sustainability. The report concluded that “80% of the studies found that stock price performance is positively influenced by good sustainability practices.” It also noted that “solid ESG practices result in better operational performance of firms, ultimately leading to higher cash flows.”
The best companies are ahead of the curve on corporate governance and sustainability. They’re looking beyond their core business and are just as focused on having a positive impact on society as they are on serving their core customer. Smart, successful advisors are already taking note. Investors no longer have to sacrifice returns to invest in the things they believe in.
This is the latest installment in our monthly series about issues facing high-net-worth families and their advisors. To learn more about what HNW Millennials want from their advisor, read an executive summary of the Proving Worth study, or gain access to the full report.
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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.
These views represent the opinions of the Head of the Private Client Group 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.