Celebrating Earth Day: How Your Investment Choices Can Make a Difference

04.20.2017 - Carin L. Pai, CFA

More than 1 billion people across the world are expected to participate in Earth Day activities this Saturday; planting trees, picking up litter and drawing attention to important issues like climate change. Environmental awareness has clearly moved into the mainstream.

Demand for Sustainable Investments is Growing

Environmental awareness is also changing the way individuals and institutions invest. According to the Forum for Sustainable and Responsible Investing, professional portfolio managers now oversee $8.7 trillion with Environmental, Social and Governance (ESG) factors in mind. To put that in perspective, ESG investing now accounts for $1 out of every $5 in professionally managed investment assets (mutual funds, etc.)

What is driving this surge in ESG investing, also known as sustainable or Socially Responsible Investing?

While environmental awareness is certainly a strong contributor, we have seen two other catalysts gathering momentum in recent years: The first is a generational shift: 83 million millennials who are passionate about investing in the changes they want to see in the world. The second is a shift in public perception: The notion that returns must be sacrificed to invest responsibly is slowly fading away.

Responsible Investing Is Sustainable

In our view, ESG investing should not require a tradeoff in performance. On the contrary, a growing body of evidence indicates that incorporating ESG factors into the research process may offer long-term performance advantages.

Companies that rank high in ESG assessments tend to have several traits in common, including:

  • A high degree of financial transparency
  • Workforce diversity
  • Competitive leadership within their industries
  • A corporate culture that encourages innovation
  • Forward-thinking management, focused on long-term results
  • The ability to anticipate and mitigate risk
  • High regulatory compliance rates

The US Department of Labor recently weighed in on the performance issue, explaining that ESG investing does not conflict with a fiduciary's responsibility to maximize investment returns. ESG data has become easier to access in recent years—sustainability reporting is now standard practice for more than 80% of S&P 500 companies. Efforts are also underway to develop a uniform set of ESG reporting criteria, which could further simplify the due diligence process.

ESG Factors Offer Insights into Corporate Cultures

In its most basic form, ESG investing helps investors understand the environmental and social impact of their investment decisions. Key business practices and “sustainability” factors are measured and monitored, either on a company level or across an entire industry. Those factors include:

  • Environmental: carbon emissions, hazardous waste disposal, natural resource protection
  • Social: child labor, wage disputes, workplace safety, product safety, political contributions
  • Governance: diversity, executive compensation, shareholder rights, transparency, compliance

At Fiduciary Trust, one of our many strengths is the ability to create personalized portfolios that reflect the environmental, social and corporate governance concerns of our clients. This can be achieved by screening out companies that score poorly in certain ESG measurements or by increasing our exposure to companies that score well on other ESG factors. We also incorporate client preferences for companies that are making positive changes in the world, such as the development of renewable energy sources or more efficient public transportation grids.

More importantly, ESG factors have become part of our standard research and analysis process as we search for high-quality companies with superior business models. As fundamental investors, our first approach is to analyze corporate balance sheets, including the firm’s operating efficiencies and profit margins. But the consideration of ESG factors adds a second layer of scrutiny, often providing valuable insights into the quality of a company’s management, culture, risk profile and trustworthiness.

The resources of our parent company, Franklin Templeton, are invaluable in this effort. Within the firm’s 100-member Portfolio Analysis and Investment Risk Group, two risk consultants are dedicated entirely to ESG investing.

Want to Know More About ESG Investing?
This guide, An Integrated Approach to Managing ESG Opportunities and Risks, provides a more detailed explanation of our approach. To learn more about incorporating specific ESG factors into your portfolio, please contact us.

This communication is intended solely to provide general information. The information and opinions stated are as of April 20, 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA institute.


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