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How to make a difference with your investments

Jon Hale, Ph.D., CFA  |  20 Sep 2019Text size  Decrease  Increase  |  
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I run into a lot of people who are interested in sustainable investing. I don't even have to ask them about it specifically, because I know who they are and the things they care about. They are people who care about doing what they can to make a difference in the world. In their everyday lives, recycling is routine, as is conserving water and energy. Many of them have stopped using chemicals on their yards. They frequent farmer's markets and jam the organics aisle in the grocery store. They increasingly consider product packaging and disposal when buying consumer products.

They are rapidly changing their mobility habits, doing more bicycling, buying more hybrid and electric vehicles or getting rid of their cars altogether and using car-share, ride-share, and bike-share services. They tend to support local efforts for more sustainable development that require things like LEED certification for new buildings and support the greening of new infrastructure projects. As the physical effects of global warming draw nearer, they have become increasingly concerned about climate change.

When it comes to the workforce, they are concerned about worker pay and gender and racial diversity. They vote because of their desire to do what they can to make a difference. Many of them have enough wealth to contribute to not-for-profits that also reflect their desire to do what they can to make a difference.

So when I tell them that it's possible to make a difference with their money through investing, they are always interested if not somewhat confused. Why? Because of their lack of trust in Wall Street and the giant global corporations that populate the funds in which they feel forced to invest. More than 60 per cent of Americans in a recent JUST Capital survey said they distrust corporations and nearly half believe business behaviour is headed in the wrong direction. (Interestingly, the opinions of investors in the survey were similar to those of non-investors.)

As a result, a lot of investors hold their noses when it comes to investing. They may delay investing, which inhibits their ability to build wealth over the long term. Once they do invest, they may regard it as a necessary evil to helping them reach their financial goals. They don't know much about what is in the funds they own. They are happy their index fund doesn't cost much but unhappy when real-life events cause them to realise, for example, that it has gun manufacturers in it and there is nothing they can do about it. Their disconnection from and distrust in their investments make it harder to stick with a regular investment plan, to stay in the market when it falls, and makes it easier to wait too long after a rebound to get back in.

Sustainable investing provides a way for people to tilt their investments toward companies that are doing the right things: lowering their carbon footprint, improving energy and natural-resource use efficiency, treating their workers well, protecting their customers' privacy, making safe and useful products, respecting the communities in which they operate, and governing themselves ethically.

Companies in sustainable portfolios are certainly not perfect, and in fact many of them can be found in conventional portfolios. But most sustainable funds also actively engage directly with companies they own about environmental, social, and governance, or ESG, issues that may be material to a firm's bottom line. They also are willing to sponsor or cosponsor shareholder resolutions on ESG issues and to vote their proxies in favour of them at annual meetings. In these ways, sustainable funds are helping encourage companies to do better. The size of the sustainable investor base in many firms is growing, thanks mostly to the growth in the number of institutional sustainable investors. This can further encourage a company's sustainability efforts by giving management a wider berth to take a longer-term perspective that considers a full range of stakeholders.

The reaction I get from having this kind of conversation about investing is invariably positive. You can see the light bulb going on when people realize that they can align their investing with the way they approach the rest of their lives. I'm convinced sustainable investing can also make them better investors--more connected to their investments because their investments are more relevant to them--and that means they are more likely to invest on a regular basis and stay the course when times get tough in the market. Those behaviours can more than make up for any fund performance differential.

Speaking of which, I don't think I've ever gotten a question about performance, partly because it doesn't make a lot of sense: Many of the companies that have embedded sustainability into their business model are today's highest-quality companies, which make good long-term investments. Those companies that haven't done so face risks from regulators, from customers switching to more sustainable products and brands, and even from not being able to attract and retain the most talented workers they need to compete. Sustainable funds as a group have consistently performed on par if not better than conventional funds.

If you are among the 75 per cent of investors interested in sustainable investing, it's easier than ever to invest that way. If you have a financial adviser, do not hesitate to ask him or her about it. With many more advisors now getting up to speed on the field, yours may be one of them. If not, it's easy to find an adviser who would be happy to discuss it with you. If you are a do-it-yourself investor, most platforms now make it easy to find sustainable funds, and quite a few now have ready-made sustainable portfolios that hew to various asset-allocation models. You can make investing another thing you do in your life to make a difference.

This article was originally published for Morningstar.com and has been edited for an Australian audience.

is head of sustainability research for Morningstar.

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