- Sustainable, responsible and impact investing (SRI) is seeing significant growth
- Contrary to popular belief, SRI doesn’t necessarily result in lower portfolio returns
- Long-term growth prospects make SRI a potential way to produce future income
You may have heard that factoring your values into your investment selection process can have a negative impact on return rates.
But is there really a tradeoff between conscientious investing and performance?
As sustainable, responsible and impact investing (SRI) has evolved, staying committed to what’s important to you doesn’t necessarily mean scaling back on your lifestyle.
In fact, adding SRI criteria to your investing strategy could positively impact investment returns: Actively managed SRI equity funds in the U.S. outperformed the S&P 500 Index on an absolute and risk-adjusted basis over the 15-year period, in aggregate, ending Dec. 31, 2015.¹
That track record — along with growing investor interest — has led to a sustainable investing boom. From 1995 to 2016, sustainable, responsible and impact investing assets grew 14-fold, from $639 billion to more than $8.72 trillion, or one in five dollars invested under professional management in the U.S.²
To find out more about how SRI can work within a portfolio, we talked to sustainable investing experts at Columbia Threadneedle Investments.
Why are some SRI funds outperforming traditional investments?
The new paradigm that’s emerged in the last few years shows that including, rather than excluding, SRI investments provides an opportunity to construct a best-in-class portfolio. In other words, looking at investments with growth opportunities, rather than merely eliminating those that don’t align with your values. Taking a proactive, rather than reactive, approach could enhance returns on securities and portfolios.
How does SRI investing work?
People often think of SRI in terms of excluding investments, say you don’t want to invest in companies that produce tobacco or weapons, for example. And portfolios constructed that way can indeed give up some returns. But a subset of SRI known as ESG — or environmental, social and governance investing — is really about including a wider array of investments with practices that appeal to investor values while also setting them up for potential long-term success. ESG is where we are really seeing strong performance within the SRI realm.
ESG investing criteria explained
How does ESG investing work?
Traditional, fundamental investing involves looking at financial statements, performance, management — a body of evidence that can be used to make investment decisions. ESG simply adds another layer to that by also weighing long-term risks, exposure and how management is meeting those challenges. The ideal investments derive their growth from business opportunities, positioning themselves to achieve financial goals while having a positive impact on society.
For risk-averse investors or those nearing retirement, might ESG be an option to consider for their portfolio?
When viewed through ESG performance, companies with sound management practices actually tend to be less volatile in the marketplace — and more steady performers should mean fewer surprises. That means ESG potentially has great applicability for those looking for a more predictable income.
What are the long-term prospects of SRI locally as well as globally?
Some of the best-performing ESG companies are in Europe, but North America is close behind. It appears that SRI is a global long-term trend, as evidenced by the United Nations Sustainable Development Goals. The U.N. has identified 17 themes for global societal success that align under their larger goals of ending poverty, protecting the planet and ensuring prosperity for all.
Find out more
Your advisor can help you explore how socially responsible investing could further align investing goals with your values.