Whether you call it responsible investing, ethical investing, impact investing, sustainable investing, green investing, or any of the other numerous names floating about, fundamentally all of these terms describe the same thing: an approach to investing that attempts to generate positive environmental, social, and/or governance (ESG) outcomes while still pursuing a financial return.
There are a number of reasons why investors typically incorporate ESG considerations into their investment decisions.
Chief among these are:
- They seek opportunities to help manage or mitigate risk
- They have a belief that companies that effectively manage ESG concerns have the potential to outperform competitors that do not
- They are intent on generating positive ESG outcomes alongside a financial return
How to Implement Responsible Investing
There’s no one-size-fits-all approach to responsible investing; and given the unique and personal motivations everyone brings to their investment strategies, an approach that works for one investor may not be applicable to another.
However, from a broad-based perspective, investors typically adopt one or more of the following approaches:
- Alignment. Here, an investor tries to align their portfolio with their personal values by minimizing exposure to companies or industries whose business practices conflict with their personal convictions.
- Integration. This occurs when an investor integrates ESG factors into their investment decisions to identify and emphasize investment into companies/organizations/products with positive ESG practices, or that address certain ESG challenges. Investors may also try to limit their exposure to those that they believe demonstrate poor ESG considerations.
- Allocation. This is where an investor allocates their portfolio to target environmental or social objectives, as a complement or alternative to philanthropy.
Responsible Investing: Myths and Misconceptions
Thanks in part to its growing popularity, many investors today are aware of responsible investing – maybe even interested in pursuing it – but have yet to incorporate any sort of responsible investing strategy into their portfolios.
Myth: The state of the environment and society at large have little impact on investors.
Reality: The environment and society directly affect investors and vice versa.
The Breakdown: Social and environmental issues – like public health, pandemics, and climate change – are entangled with the financial system, and in turn, with the portfolios of investors. You only need to look back on recent history to see this being the case. Investing in organizations and causes that address these issues can add resiliency to the economy and help drive financial success.
Myth: Responsible investing is just a fad that many investors have little interest in.
Reality: Responsible investing as a movement is poised to grow within the financial services industry and will likely draw increasing numbers of investors.
The Breakdown: According to the US SIF Foundation, U.S. assets managed with a responsible investing strategy grew at a compound annual growth rate of 16 percent from 2014 to 2018, to $11.9 trillion. While millennials and women are showing a special interest in these strategies, there is growing interest across all swaths of investors.
Myth: Responsible investing strategies stifle financial performance.
Reality: Responsible investing does not stifle financial performance.
The Breakdown: Responsible investing is no longer just about excluding “bad” companies from portfolios. Investors today are using a variety of analyses on environmental, social, and governance factors to evaluate risk and return. Moreover, research indicates that there is no performance penalty associated with responsible investing strategies.
The Bottom Line
Responsible investing allows for an opportunity to generate positive environmental and social changes while simultaneously allowing investors to pursue traditional financial returns.
More so, it’s a movement that shows every sign of continuing to grow in popularity.
For more information on responsible investing, or to discuss your investment strategy in more detail, contact a PNC Investments Financial Advisor, today.