There’s been a big increase in interest in sustainable investing in recent years. But what exactly do we mean by sustainable investing? And, if we invest with our conscience, can we expect to receive lower returns?

Robin Powell explores these issues in this short video, with the help of Dan Lefkovitz from Morningstar.

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Video transcript:

An important development in the financial industry in recent years has been the growth of sustainable investing. But what exactly does it mean? Here’s Dan Lefkovitz from Morningstar:

“We define sustainable investing rather broadly. We consider it to be a long-term investment approach that incorporates environmental, social and governance criteria - ESG. And, it can range from sort of old-fashioned, exclusionary screening, like you might’ve seen in an ethical or socially responsible fund. Avoiding stocks of alcohol, tobacco or gambling companies, perhaps coal. It can also be just integrating ESG factors into the overall investment analysis. And that sort of integration is actually the most popular form of sustainable investing today.”

Passively managed funds are very cost-effective, but, by definition, they generally invest in the whole market. So, is there a conflict between passive investing and sustainability? Dan Lefkovitz says, on the contrary, they complement each other well.

“It’s interesting, you might think that, but in fact, we’ve recently seen quite the opposite. So, we’ve seen big passive investment managers, the likes of BlackRock, Vanguard, and StateStreet become a lot more active with the companies that they own, simply because they are replicating an index. Now you are seeing passive investment managers who have to own these companies and feel like they’re sort of suck in a long-term relationship with no option for divorce, be more active when it comes to their ownership.”

If you want to combine passive investing with sustainable investing, there are funds available — particularly exchange-traded funds — that effectively do both.

Lefkovitz says: “We actually think that sustainable investing lends itself very well to index funds and to exchange-traded funds. The kinds of positive and negative screens that are typically employed with sustainable investing actually fit very well in index and exchange-traded fund format. There also seems to be an alignment between the demographic that sustainability appeals to and the exchange-traded fund. Younger investors like sustainability and they also like exchange-traded funds.”

Of course, all investors are ultimately looking for good returns. So, is there is a price to pay for investing with your conscience?

“The number one frequently asked question we get about sustainable investing is: “Do you sacrifice returns if you are investing sustainably?”. And, interestingly, maybe in theory if you’re limiting your universe and not investing in certain companies because they’re not sustainable, that would be limiting. In practice, our data show, that sustainable funds perform on par with their non-sustainable counterparts. There is even some evidence to show, that sustainable investing leads you to companies that are poised for outperformance.”

That’s it. Thank you to Dan Lefkovitz from Morningstar.

Picture: Shawn Bagley via Unsplash

Ask any parent, teacher, sports coach or line manager, and they’ll say the same thing. 

It’s easier to criticise than it is to praise. But the latter is far more likely than the former to produce the outcomes you want to see.

Of course, there’s a place for both the carrot and the stick, but all too often we get the balance wrong. Our in-built bias towards negativity means the tendency to blame comes much more naturally than the urge to encourage.

The oil companies

Take climate change, for example — and, in particular, what different companies are doing to tackle the problem, or indeed to exacerbate it. 

The big oil companies have rightly borne the brunt of criticism from environmentalists. True, they are, at least, finally acknowledging the need for action. Yet the resources that they invest in alternative energy remains only a tiny fraction of their expenditure on traditional oil and gas.

Calling out those firms that fail to match their words with action is of course important. But we also need to acknowledge the good guys — companies that are genuinely playing as part in addressing the climate crisis.

Several such firms were highlighted at The Values-Based Adviser, which IFAMAX helped to organise.

In his presentation, Dr Jake Reynolds from the Cambridge Institute for Sustainability Leadership highlighted two firms in particular that are really getting their act together.

Setting the standard

The first was the confectionery company Mars. Each year, according to the United Nations, an area the size of Bulgaria is lost to drought and desert. That’s enough land to grow 20 million tonnes of grain a year. To help reduce pressure on natural ecosystems, Mars has set as its goal freezing its land footprint, even as its business grows.

The second company singled out for praise by Dr Reynolds was Ikea. The Swedish flatpack furniture maker has substantially upped its game on the environmental front in recent years. As well as becoming climate positive, Ikea is committed to regenerating resources, protecting ecosystems and improving diversity.

Other firms that Dr Reynolds believes deserve recognition are the following:

Unilever (committed to sourcing all agricultural materials from 100% sustainable original by the end of next year)

Pirelli (improving methods of rubber extraction in Indonesia to extend tree life and reduce deforestation)

Fuji Xerox (now operating a closed-loop recovery system through product take-back, reuse and recycling, which is 99.5% effective)

Iberdrola (providing energy access to 4 million disadvantaged people by 2020, producing 50% less carbon dioxide by 2030)

Novo Nordisk (working with cities round the world to map and analyse the root causes of unsustainable planning) 

Balancing price with environmental impact

So, what are we saying? First of all, we’re not saying you should go out and buy these companies’ products and services. From a sustainability point of view, the less consuming we do the better.

But you should consider factors other than price when making a purchasing decision, and they should include environmental ones.

Remember too that you can support the efforts being made by responsible companies to tackle the environmental challenges we face by investing in a sustainable fund. 

The GSI Global Sustainable Value Fund, for example, which we at IFAMAX use, considers a company’s approach towards environmental, social and corporate governance (ESG) issues; companies with higher ESG scores are given a larger weighting than those with lower scores.

Seeing through the gloom

And one more thing. That negativity bias we referred to earlier also helps to explain how the climate crisis is covered in the media. There are so many more negative stories than positive ones that it’s not surprising that many of us find this whole issue depressing and overwhelming. 

The true picture is actually more positive. There are companies out there who are talking climate change very seriously. They deserve our support and encouragement.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

Weekly round-up: Week 48, 2019

Pictures: Ankush Minda and Adrià Crehuet Cano via Unsplash