Sustainable Investing Becoming Mainstream
By Scott McClatchey, CFP®
Doesn’t it seem like every advertisement or press release includes the word “sustainable” these days? Everyone is bragging about reducing their carbon footprint or converting to renewable energy sources. It reminds me of the late 1990’s when companies wanted to add “dotcom” to their name, whether they were in the info-tech industry or not. Remember pets.com?
With that in mind, it may not be surprising that you can now purchase sustainable investments. The idea is to align your investing strategy with your environmental or social beliefs and value system.
Over a century ago, Quakers asked for a portfolio free of the “sin stocks”, which generally meant companies in the tobacco, alcohol, gambling, weapons, and oil & gas businesses. Their request led to Socially Responsible Investing, or SRI, which primarily screened out specific industries. But over time SRI evolved or morphed into today’s ESG, which stands for Environmental, Social, and Governance.
In ESG investing, synonymous with sustainable or green investing, portfolio managers consider Environmental, Social, and Governance factors when selecting stocks or bonds, along with more traditional financial parameters. Some ESG managers still start by screening out certain industries, but then they apply an ESG rating system to decide which of the available stocks to purchase. Today it’s possible to buy mutual funds, ETFs, hedge funds, or private equity funds with sustainable features built into the portfolio selection criteria. Many believe ESG investing can reduce portfolio risk and generate competitive returns while helping investors align their values with their investments.
But buyer beware: One fund company’s ESG fund might not make the cut at another, more specialized, ESG fund company. That’s because ESG criteria is not yet standardized. Fortunately, there are some small or boutique companies who specialize in ESG investing and have a solid systematic process for integrating environmental, social, and governance criteria into their investment selections.
The big-name fund players are also introducing ESG funds these days, but if you want to ensure funds meet your own ESG goals and adhere to your personal values, it pays to dig into the specific ESG criteria for each fund.
Environmental criteria might include climate change policies, plans, or practices, greenhouse gas emissions, carbon footprint, water usage or conservation, recycling, renewable energy, or green products. Social criteria include employee treatment, pay, benefits, perks, engagement, and turnover, training and development, safety policies, diversity and inclusion in hiring and promoting, ethical supply chain sourcing, consumer service responsiveness and protections, lawsuits, recalls, and regulatory fines/penalties, as well as company stances on social justice issues. Governance refers to executive compensation, bonuses, and perks, use of golden parachutes, diversity of board of directors and senior executives, proxy access, multiple-class stock structures, communications transparency, lawsuit history, and regulatory compliance.
Sustainable investing is a departure from shareholder value maximization. Today’s more enlightened management teams understand that, to satisfy both inside and outside stakeholders, it may be necessary to depart from a profit-at-any-cost business model. In my opinion, this is a welcome change, and over time I expect ESG investing will become more and more mainstream.
Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNERTM with WWM Financial, an SEC registered Investment Advisor in Carlsbad, CA. He can be contacted by phone on 760-692-5190 or by email at scott@wwmfinancial.com .
