Sustainable Investing Going Mainstream by Dave Werle
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monumental change is happening in the world of investing: the rise of Sustainable Investing. As of 2018, one in four dollars invested by individuals and institutions in the U.S. are now in sustainable and responsible investment vehicles. That equates to $12 trillion, an increase of 38% just since 2016 according to the US SIF Foundation's 2018 Report on US Sustainable, Responsible and Impact Investing Trends.(1) That shift seems very likely to continue in the coming years. However, the investing public and even some financial advisors, continue to have significant misperceptions about sustainable investing. The misunderstandings are rooted in the origins of this type of investing. Socially Responsible Investing was birthed way back in the 1700s from the demand from some religious institutions (Quakers first, then Methodists) for their congregations to avoid investing in sinful things – slavery, weapons, liquor and tobacco. By the 1980s, this practice of avoiding certain types of investments had expanded to include environmental issues and avoidance of companies doing business in South Africa due to apartheid. The notion of socially responsible investing was laden with value statements about certain industries, companies or practices that were deemed harmful to society. This avoidance approach had its limitations. Investing this way was complicated and very new. How could you know how much pollution was emitted by a certain company? Disclosure 10 | 50+ Living | April 2020
from companies was limited. Also, avoiding oil stocks during the boom times of oil had a dampening impact on investment returns. A common perception emerged that you had to give up some investment performance to invest according to your values. Not many wanted to make that trade off. Skepticism was common. In more recent years, professional investment managers have developed an inclusion approach. They seek to find and invest in companies that are standouts in environmental, social and corporate governance “ESG” measures. This more comprehensive approach, now termed Sustainable Investing, has changed things dramatically. Integrating ESG performance into financial analysis of companies provides greater insight into risks and opportunities for investors. At the same time, two other factors have contributed to the rise of Sustainable Investing. First, fossil fuel corporations’ market dominance declined. They now make up a smaller portion of the earnings and growth of the largest U.S. companies. The FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) plus other tech giants like Microsoft, now far surpass oil companies in terms of market capitalization. Not having oil companies in an investment portfolio now has a more limited impact. Second, disclosure of sustainable practices by the largest U.S. public companies has increased substantially. According to
