Sustainable investment best practices have become a cornerstone of overall investment strategy for investors around the world. In recent years, these trends have accelerated, and the American private and public capital markets reflect and exemplify these developments.
One defining reason for this shift is simply that most investors' strategic investment decisions are driven, at least in part, by their personal values.
In the midst of this shifting paradigm, confusion remains regarding the many terms used to describe investors’ desire to uphold fiscal responsibility while simultaneously promoting important societal or environmental benefits. Investors often use terms interchangeably, such as "sustainable investing," "ESG investing," "impact investing," "socially responsible investing," and others.
There are semantic differences that separate these terms and the contexts in which they're used, but they all advocate for incorporating some element of sustainable investment into traditional investment decision making, fund management, and shareholding engagement activities.
Sustainable Investing as Risk Mitigation
Although the goals of healthy financial return and advancing social, environmental, or governance practices might feel at odds, sustainable investors do not see these outcomes as in conflict with each other. Even “traditional” investors have begun to embrace sustainable strategies to manage and mitigate both short-term and long-term risk. In fact, a growing body of research, like the 2020 Report On US Sustainable, Responsible And Impact Investing Trends from the Forum for Sustainable and Responsible Investment (US SIF), shows a positive link between financial performance and corporations’ commitment to ESG1.
For example, a sustainable investment approach recognizes that a company with a heightened focus on workplace well-being might have happier, more productive employees, which may reduce absenteeism, which ultimately impacts the bottom line. Another example would be prioritizing a company committed to cities, sustainable living, and waste reduction because these factors can lower expenses, liabilities, or even establish more secure supply chains. Thus, they may avoid potential pitfalls that their competitors may encounter.
The Role of Investor Advocacy in Sustainable Investing
Investor advocacy, which occurs when shareholders drive proposals, is another major contributor to the sustainable investing boom. Historically, shareholder proposals have provided a low-cost method for shareholders to communicate with management and each other about the future of their company and important policy issues affecting it.
Health, political, and economic crises framed 2020, so it may come as no surprise that disclosure and management of corporate political spending and lobbying became leading issues raised in the shareholder proposals filed since 2018. In a time of rapid social change, investors are also focusing on ending de facto workplace discrimination on the basis of ethnicity and sex1. The leading ESG issues in proposals filed from 2018 to 2020 were:
- Corporate Political Activity
- Labor & Equal Employment Opportunity
- Climate Change
- Executive Pay
- Independent Board Chair
- Special Meetings
- Written Consent
- Human Rights
- Board Diversity
- Proxy Access
The Importance of Disclosures for Investors and Companies
Like many investment trends, sustainable investing continues to experience growing pains as it evolves and redefines the industry. But these changes also affect the companies in which investors deploy capital. To receive financing from a sustainable investor, how should a company prove that it operates sustainably and fits the investment criteria? Defining and standardizing the answer to this question continues to puzzle investors. Companies vary based on composition, customer, and industry, so standardizing the disclosure of metrics remains difficult.
Investment managers need to determine how they will integrate specific sustainable investment factors into their investment process, and they must be able to communicate what those criteria are. As the practice matures, levels of sustainable factor reporting by companies will likely improve, and both internal and third-party rating systems will improve and become more standardized.
Sustainable investing in the United States continues to expand at a healthy pace. According to US SIF, the total US-domicile assets under management using sustainable investing strategies grew 42 percent from 2018 to the start of 2020, from $12.0 trillion to $17.1 trillion. For companies to be resilient over the long term, to avoid potential risk, and to remain attractive to future investors, they will need to manage with an eye on sustainability.
For investors, the practice of sustainable investing will provide ever-increasing opportunities to uphold fiduciary responsibilities for themselves and their clients, while expanding the potential positive impact on society and the environment. Although the future of sustainable investing is yet to be written, the opportunities for channeling one’s wealth to grow while also improving lives in communities around the world have never been more promising.
Source 1: US SIF Trends Report 2020
Table 1: US SIF Report on US Sustainable and Impact Investing Trends 2020 Executive Summary, https://www.ussif.org/files/US%20SIF%20Trends%20Report%202020%20Executive%20Summary%20Final.pdf