Earth Day 2016: ESG Investment Strategies Continue to Evolve Across the Globe

As we celebrate Earth Day in 2016, I thought it was appropriate to reflect on how much the investment industry has evolved to keep pace with the evolving marketplace for sustainability and impact investments in general across the globe. While companies continue to make strides towards becoming better stewards of the environment, stronger governors of their companies and consistent contributors within their communities, investment managers are also making their own strides by incorporating more refined screening criteria to identify these very companies for their portfolio strategies.

Looking to the past, traditional socially responsible investing (the “old SRI”) represented an investment style that uses both positive and negative screens to include or exclude companies in a portfolio based on social, moral, ethical and religious criteria. For the majority of the existing SRI strategies in the marketplace, this equates to an exclusionary process that excludes companies who may have a certain percentage of their revenue derived from areas such as weapons, tobacco, alcohol and gambling. Other SRI strategies may look to exclude the stocks of companies in certain industries, or sub-industries, which are associated with these socially taboo areas.

Some critiques of traditional socially responsible investing strategies (the “old SRI”) are that they often do not consider the investment merits of a given company’s stock and that the excluded companies that were perhaps “sinful” in certain areas were providing positive, sustainable characteristics in other areas and yet are excluded anyway. Limiting the sectors or industries that are included in a given investment portfolio can also hinder potential diversification and/or growth of capital opportunities. It is fair to say that, in general, any self-imposed portfolio constraints can often also present constrained portfolio growth potential.

Looking to the future, sustainable, responsible and impact investing (the “new SRI”) offers what I believe to be a more dynamic approach to investing in this rapidly growing area. In response to some of the previously mentioned critiques of the “old SRI”, this type of investing involves more of a positive, proactive and comprehensive review of a company to provide for a more robust picture of the company’s operations and social, as well as economic, impact. Factors considered for this type of investing generally fall into the categories of environmental, social and governance (ESG).

Investopedia defines the application of these factors as a set of standards for a company’s operations that socially conscious investors use to screen investments.

Environmental criteria looks at how a company performs as a steward of the natural environment

Social criteria examines how a company manages relationships with its employees, suppliers, customers and the communities where they operate

Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights

There are several firms that now specialize in performing the in-depth research necessary to arrive at a composite ESG score or rating for a given company – which are mostly larger cap in size. Examples of these research companies include, but are not limited to, Sustainalytics, IW Financial, Thomson Reuters, MSCI and Morningstar.

There is some evidence that companies with embrace sustainability actually perform better financially than those that do not. A 2014 research study by the firm CDP found that corporations that are actively managing and planning for climate change (one of the issue areas that ESG considers) achieve an 18% higher return on investment (ROI) than companies that aren’t planning for climate change, and 67% higher than companies who refuse to disclose their emissions. Through impact investing, investors will look to invest in companies, or investment strategies, that combine both social and financial returns. In other words, investors now want their conscience and wallets to both feel good about the companies that they are investing in through their stock portfolios. This is especially true for the millennial generation (generally referring to those born between the early 1980s to the early 2000s). A recent global online study conducted by Nielsen found that millennials continue to be most willing to pay extra for sustainable offerings — almost three-out-of-four respondents in the latest findings, up from approximately half in 2014. Interestingly, the baby boomer generation (generally referring to those born between the years of 1946 – 1964) also value sustainability, as the same Nielsen survey found that 51% of baby boomers surveyed are also willing to pay extra – an increase of seven percentage points since last year. Though not necessarily referring to sustainable investment strategies, the results of this study seem to support a growing, global and cross-generational interest in companies that promote sustainability.

The rising trend toward the “new SRI” is not limited to the United States. Assets under management incorporating sustainability investment strategies reached $21.1 trillion globally as of the beginning of 2014, up 61% from the onset of 2012, said the “Global Sustainable Investment Review 2014,” released by the Global Sustainable Investment Alliance. As a result of the growth, assets that use a sustainability approach accounted for 30.2% of all assets under management across the regions covered by the review, up from 21.5%. Interestingly, negative screening (i.e. “old SRI”) is the largest strategy in Europe, while ESG integration (i.e. “new SRI”) now dominates in the United States, in the Australia/New Zealand region and across Asia in asset-weighted terms according to the report.

Additionally, according to a Merrill Lynch article entitled, “Socially responsible investing: Aligning your principles with your investing goals”, managers representing 15% of the world’s investable assets committed to socially responsible investing in 2013 and managers/strategies representing more than $45 trillion in assets committed to investing through the United Nations Principles for Responsible Investment (UNPRI) in 2014.

Investment preferences continue to change as the climate continues to change (pun intended). Fortunately, the marketplace of available sustainable and impact investment strategies continues to change as well. Given that much work still needs to be done, I would anticipate even more development within this area of great interest in the years ahead. Happy Earth Day!

Disclosure:  IW Financial is a current research provider in association with the SmartTrust®, Sustainable Impact Investing Trust.  This paper is provided for informational purposes only.   The discussion of specific stocks or UITs is not a solicitation to buy or sell any of the referenced securities.  Investors should consider the Trust’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information relevant to an investment in the Trust. Please advise your clients to read the prospectus carefully before they invest. If a prospectus did not accompany this literature, please contact SmartTrust at (888) 505-2872 or visit to obtain a free prospectus.