MARKET COMMENTARY

Investing for Impact: Are You Walking the Walk?

10.20.2017 - Carin L. Pai, CFA

As more investors align their personal values and financial goals, the popularity of socially responsible investing, often referred to as ESG, is soaring. Director of Equity Management, Carin L. Pai, explains the forces driving the rapid growth of socially responsible investing and the techniques Fiduciary Trust uses to help our clients invest responsibly.

Why is responsible investing so popular?

CARIN: We see two primary drivers of demand. First, millennials are passionate about how the money they invest affects their communities and the world around them. High-net-worth millennials are particularly interested in aligning their investments with their personal values, a trend that contradicts some of the less attractive stereotypes about this generation. They aren’t shy about voicing their support for a cause they feel strongly about and they don’t want to be hypocritical. They want to actually ‘walk the walk’ as well as ‘talk the talk.’

Secondly, information about a company’s environmental, social and governance (ESG) practices has become much more readily available. So it is easier for millennials and other investors to find companies that share their values. Almost 80% of S&P 500 companies now include information about their sustainability efforts in annual reports, up from just 20% five years ago. Sustainability metrics include information about how the company promotes social justice, protects the environment, conserves natural resources and conducts business in a way that is ethical and does not harm the economy.

Have President Trump’s policies discouraged this trend?

CARIN: We haven’t seen any signs of a slowdown. Yes, it could be argued that the new administration has a more favorable view of fossil fuels than the previous administration. But the environmental movement, both on a grass roots level and in corporate boardrooms across the world, isn’t going away. Many of our clients are choosing to reduce their exposure to companies that rely heavily on fossil fuels.

Can I target a specific cause in my portfolio?

CARIN: Yes. One of our strengths is the ability to create portfolios that reflect the environmental, social and corporate governance concerns of each client we serve. This can be achieved by screening out companies that are involved in certain businesses, like tobacco or weapons, or “screening in” companies that are in alignment with an investor’s values. One approach that is gaining popularity is thematic investing, pinpointing clusters of investments that are associated with a particular ESG issue. For example, an investor who wants to improve working conditions for factory workers might filter out companies that have violated child labor laws, been cited for workplace safety violations, been involved in wage disputes with employees or fined for discriminatory hiring practices.

We also use positive screening techniques to incorporate client preferences for “purpose-driven” companies that are making positive changes in the world, such as the development of renewable energy or more efficient public transportation grids. We have the ability to screen companies for more than 1,000 ESG-related policies, programs and performance metrics, so we can help investors align their portfolios with a wide variety of issues that are important to them.

Will I sacrifice returns?

CARIN: Not necessarily. In fact, incorporating ESG factors may actually improve your performance, depending on the criteria you use. As fundamental investors with a bias for high quality, we incorporate ESG factors into all of our decisions as a risk-management tool, in much the same way we evaluate corporate balance sheets for risks. ESG data provides valuable insights into a company’s culture, the strength of its management team, employee relations and trustworthiness. This offers us a deeper understanding of the firm’s long-term sustainability and growth prospects. When done properly, this approach can help investors avoid corporate failures that are caused by lawsuits, regulatory fines and other behaviors that damage a brand’s reputation. As BARRON’s pointed out recently, “good governance is systemically important.”

The resources of our parent company, Franklin Templeton, help us tremendously in this effort. The firm’s 100-member Portfolio Analysis and Investment Risk Group includes two risk consultants dedicated entirely to ESG research. Franklin Templeton signed the United Nations Principles for Responsible Investment in 2013, joining a network of global investors that pledged to follow six key principles.

Are there risks associated with ESG investing?

CARIN: Well, there has been substantial progress made on defining and measuring responsible investing, but we still have a long way to go before there is a uniform set of industry standards. Also, it is possible for an investor to screen a portfolio so aggressively that it becomes difficult or impossible to generate competitive returns. And individuals who hold investment accounts at several different financial firms run the risk of conflicts—investments in one portfolio that run counter to the ESG goals of another portfolio. We work closely with our clients to avoid these potential pitfalls.

How can I make the biggest impact possible?

CARIN: Most investors find an approach that offers the right balance between competitive returns and maximum impact in one of the approaches I’ve discussed so far. But for individuals who want to promote change without any expectation of financial reward, the obvious choice is philanthropy. As a full-service wealth management firm, Fiduciary Trust not only offers professional investment advice and estate planning services, but also a broad array of charitable giving strategies; including private family foundations, charitable trusts, donor advised funds and other tax-efficient approaches to philanthropy.

We understand that doing well financially can go hand-in-hand with doing good things for society, and we have the resources to make that happen in the most effective way possible.

Positive and Negative Screening Can Boost the Impact of Your Investments


This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as of October 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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