Sustainable Investing: More Important Now than Ever Before
Aimee B. Forsythe, CFA Senior Vice President, Senior Portfolio Manager
What is Sustainable Investing?
Sustainable investing is an investment discipline that considers environmental, social and governance (ESG) factors as part of the research process with the goal of identifying opportunities for competitive financial results while also investing with good corporate citizens. While investors may have particular areas of personal interest related to ESG investing, common investment themes typically include environmental stewardship, labor relations, social equality, community development and corporate governance.
History and Growth of Sustainable Investing
The roots of sustainable investing in the US started in faith-based communities in the 1700s. Within the investment community, the Pioneer Fund, established in Boston in 1928, sought to avoid “sin” industries as part of its proposition to investors. Socially responsible investing enjoyed a resurgence in the 1960s, as protests over the Vietnam War and the fight for social equality highlighted the role of big corporations and how corporate profits were earned at the expense of human suffering or environmental damage. Divestment was a theme of the 1980s as institutions and companies began to avoid investments in South Africa as activism against apartheid surged. Interest in socially responsible investing continued to grow in the 1990’s and the early 2000s, with the concept of sustainability becoming more prevalent as investors sought to move beyond social issues to include the environment and corporate governance in their investment decisions.
Sustainable investing today has entered the mainstream, embraced by individuals, foundations, pension plans and universities. The 2018 trends report published by the Forum for Sustainable and Responsible Investment (US SIF) showed $12 trillion in assets under management in US funds where a combination of environmental, social and governance (ESG) factors were used in the investment process. This represents growth of 38% from the previous reported period in 2016; sustainable investments account for one quarter of all dollars under professional management in the US.
As the country continues to be quarantined during the COVID-19 pandemic, stock mutual funds with an ESG mandate have continued to see an inflow of new assets. As the chart below shows, the highest months for inflows have come in the last two quarters as COVID-19 brings a renewed awareness of global citizenship, health, wellness, financial stewardship and environmental responsibility.
Sustainability’s Role in the Investment Process
At Cambridge Trust, the consideration of sustainability has been a standard part of our investment research process for many years, regardless of which specific strategy a client is signed up for. Of course, those clients selecting our SRI strategy have the most emphasis on sustainability in their portfolios, but all investments have consideration of long-term sustainability in their debate for investment approval by our research team. After a rigorous fundamental analysis of each potential investment, we look at a company through a sustainability lens not only as a means of assessing the financial risk profile, but also to assess culture, business processes, governance and relationships with stakeholders and the environment. Though these factors might not all be immediately relevant to next quarter’s earnings, they are certainly relevant during the multi-year horizon over which we seek to invest. Similarly, during that multi-year horizon, it is likely that volatility will surface that will test a company’s resilience, much like COVID-19 is doing currently. Those companies that practice good sustainability habits, are more likely to have the resilience across internal staff, but also across external client and customer bases to withstand intermittent, dramatic volatility such as the current environment.
Sustainability considerations pair well with our philosophy and preference for quality companies with long-term growth prospects, good financial stewardship (avoid excessive debt), and sound business models. In this time of volatile virus headlines, we expect to lean on these factors in our research process more and more.
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