SUSTAINABLE INVESTING

A Primer on Sustainable Investing

06.16.2021

The investment management industry has seen a rapid rise in investor interest in sustainable investing strategies. In 2020, fund flows into sustainably-themed mutual funds topped $51.1B, more than doubling 2019’s record-setting fund flows—and nearly 10 times the 2018 sustainable fund flows[1].

Alongside this growth in capital has come an expanding list of terminology, products and strategies, and data for investors to sort through. We recently hosted a live webinar titled “Introduction to Sustainable Investing” as a primer to help investors better understand the terms and trends in order to make informed decisions with their capital. Presenters included Head of Portfolio Management, Carin Pai; Managing Director, Portfolio Manager, Colleen Silver; and Vice President, Sustainable Investing, Jeff Finkelman.

What is Sustainable Investing?
Sustainable investing is an umbrella term Fiduciary Trust International uses to describe the full range of investment activity that occurs between traditional investing, where an investor is focused solely on financial considerations, and philanthropy, where one is exclusively focused on solving for social and environmental issues.

We break the sustainable investing landscape into three main categories:

Values Driven Investing: Values-Driven Investing is the practice of avoiding exposure to businesses or industries that conflict with one’s values or worldview. Investment strategies in this category typically establish a set of negative screening criteria to keep certain companies or industries out of the portfolio.

ESG Investing: Environmental, social and governance (ESG) investing involves the use of ESG data and analysis to inform the investment decision-making process. ESG data is useful, not only in identifying companies to avoid, but also in identifying companies to own. At Fiduciary Trust International, our actively managed equity strategies practice ESG integration by combining ESG data with traditional financial data to get a fuller picture of the risks and opportunities associated with an investment. Jeff Finkelman shares more about this growing investment approach in, “ESG Investing: Top 5 Questions Answered.”

Impact Investing: Values-driven and ESG investing primarily help investors ensure their portfolios are aligned with their values and investment views. Impact investing goes a step further and involves the use of capital to affect positive, measurable change in the world, while also generating a financial return. Impact investors target a wide range of social and environmental issues, from climate change and conservation to financial inclusion and community infrastructure.

Sustainable investing overall is compatible with building an investment portfolio that is return-oriented. Each of these strategies can be used alone or in combination to achieve an investor's particular investment objectives, as well as their sustainability objectives.

Why Has Sustainable Investing Experienced Significant Growth?

There are several well-documented trends that point to the rising appeal of ESG investing.

Reporting
The growing popularity of reporting on sustainability by companies contributes to the growth of ESG investment strategies. As the metrics and the availability of reporting data increases, so too has the use of that data by investment managers. Last year, KPMG found that 80% of the top 5,200 companies globally now report on sustainability[3]. As the amount of data being generated increases exponentially, groups like the SEC have started to take note. The SEC recently formed a task force focused on climate and ESG issues to identify material gaps in company disclosures around climate risks.

Millennials

One of the trends that is especially powerful is millennials’ interest in the space. A 2019 Morgan Stanley Institute for Sustainable Investing survey recorded 95% of millennials as interested in sustainable investing[2]. As this generation enters its peak earnings years and begins to assume the role of stewards for their families' wealth, their viewpoints have a material impact on demand for ESG integrated investments.

Performance
Recent performance trends have been strong for ESG investment strategies. Last year, ESG investment strategies tended to outperform their traditional peers, both when the pandemic led to a market decline, and in the subsequent rebound[4]. At the end of the 2020, over 75% of ESG equity funds ranked in the top half of their peer category’s performance[5].

What Impact Does ESG Integration Have on Performance?

There is a growing pool of research confirming that ESG is not return sacrificing. In fact, it may even produce less risk. A recent study found that stocks with the worst ESG exposures have volatility, or risk, that is up to 15% higher than stocks with the best ESG exposures[6]. This suggests that ESG integration can improve risk-adjusted returns or generate the same amount of performance while taking lower amounts of risk.

A 2019 Morgan Stanley analysis came to a similar conclusion. The authors found that for the period of 2004 to 2018, the returns of sustainable and traditional funds have been similar regardless of geographic region, asset class, or time period. They also found that sustainable strategies might offer lower volatility and downside risk relative to peers[7].

But it is important to note that studying the relationship between ESG and returns is challenging because every investment manager uses ESG data in a different way. Their choices about which categories of ESG data to consider, how much weight to place on ESG analysis, and the role it plays in portfolio construction all influence a strategy’s return profile. For that reason, we tend to evaluate ESG integration on a strategy-by-strategy basis, coming to our own conclusions about whether a particular manager’s ESG integration process truly adds value to investment returns.

Can Sustainable Investing Practices be Incorporated into Trust Portfolios?

We continually work alongside our trust counsel to stay informed about the evolving adaptation of trust rules around sustainable investing. One of the strengths at Fiduciary Trust International is the incredible level of collaboration between our specialists and portfolio managers as we steward capital for our clients.

There are numerous opportunities for clients to incorporate sustainable goals alongside financial objectives. Our belief is that when sustainable investing is integrated into our fundamental analysis for long-term financial success, this approach algins with the guiding principle of our fiduciary duty to clients within the context of trusts.

Ultimately, we want to make sure that all current and future beneficiaries’ interests are equally represented. We would encourage our clients to share their views with their portfolio managers so that they can advise on the best solutions for them.

To learn more about sustainable investing, our firm’s approach to ESG integration, and how we support our clients who choose to align their values with their investments, please view a replay of our live webinar, “Introduction to Sustainable Investing,” here.  

[1] Hale, Jon, Morningstar, “Sustainable Funds Weather the First Quarter Better Than Conventional Funds,” April 3, 2020 https://www.morningstar.com/articles/976361/sustainable-funds-weather-the-first-quarter-better-than-conventional-funds

[2]Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals,” 2019. https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf 

[3]McKenzie, Mark, KPMG Impact, “The Time Has Come: Survey of Sustainable Reporting 2020,” 2020. https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf

[4] Hale, Jon, Morningstar, “Sustainable Funds Weather the First Quarter Better Than Conventional Funds,” April 3, 2020. https://www.morningstar.com/articles/976361/sustainable-funds-weather-the-first-quarter-better-than-conventional-funds

[5] Hale, Jon, Morningstar, “Sustainable Stock Funds Held Their Own in Second-Quarter Rally,” July 8, 2020. https://www.morningstar.com/articles/991091/sustainable-stock-funds-held-their-own-in-second-quarter-rally

[6]Dunn, Jeff; Fitzgibbons, Shaun; Pomorski, Lukasz, Journal of Investment Management, “Assessing Risk through Environmental, Social and Governance Exposures,” February 24, 2017.  https://www.aqr.com/Insights/Research/Journal-Article/Assessing-Risk-through-Environmental-Social-and-Governance-Exposures

[7] Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals,” 2019. https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf 





This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. 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.

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SUSTAINABLE INVESTING

ESG Investing: 5 Top Questions Answered

05.06.2021 Jeff Finkelman, Senior Research Analyst

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