Why sustainable investing might be good for your wallet too

Investors want to know whether sustainable investments have the returns to back them up. The answer may surprise you.

In the mid-1980s, college students led sit-ins on campuses across the United States. They weren’t protesting grades or policies; they weren’t really protesting anything on this side of the world. They were protesting their universities’ investments in South Africa, where the government had enforced the brutal and inhumane system of apartheid since 1948.

The students were largely successful. More than 150 universities fully or partially divested from corporations with presences in South Africa, and eventually, companies like General Electric, Coca-Cola, and IBM withdrew from the country as well. The movement brought apartheid to the forefront of the American consciousness. In 1986, Congress passed sanctions on South Africa. In 1990, Nelson Mandela was released from prison and led negotiations to end apartheid.

Today, investing with your values is once again in the spotlight. According to a 2018 report from the Forum for Sustainable and Responsible Investment, sponsored in part by BlackRock, sustainable investments account for $12 trillion of the total assets under professional management in the US. That’s one in four dollars under management — an increase of 38 percent from 2016.

Millennials have driven much of the growth, with 67 percent saying they want their investments to reflect their values, according to BlackRock Global Investor Pulse Survey, 2019. But these young idealists are only a small part of the picture. According to a UBS survey of investors, more than 60 percent of non-adopters said they have avoided sustainable investments because of one big fear: that investing with your values means sacrificing returns. A growing body of evidence, however, shows their concerns might be unfounded. The surprising truth is that sustainable investing might benefit your portfolio, as well as the world.

Sustainable investing is the combination of traditional investment approaches with environmental, social, and governance (ESG) insights, allowing investors to do more with their money.

At its broadest, sustainable investing might mean avoiding companies that don’t align with your values, such as those in the tobacco, fossil fuel, or firearms industries. Next, you could go beyond opting out and focus on supporting companies with higher environmental, social, and governance (ESG) scores relative to their peers. (While far from perfect, these third-party scores provide a decent starting point for investors, as they consider factors like a company’s carbon emissions, waste disposal, political contributions, and employee safety.) At the most targeted end of the sustainable investing spectrum lie “thematic” and “impact” investments. Thematic investing focuses on a particular environmental, social, or governance issue such as renewable energy. Lastly, you can seek to achieve a measurable sustainable outcome alongside a financial return through impact investing.

Although it undoubtedly feels good to support companies you believe in, it’s also imperative for investors, whether institutional or individual, to look at the numbers. How has sustainable investing performed when compared to traditional strategies?

Pretty well, as it turns out. A meta-analysis of more than 2,000 studies, published in the Journal of Sustainable Finance and Investment, compared the relationship between ESG and corporate financial performance (CFP) since the 1970s. It determined that “roughly 90 percent of studies find a nonnegative ESG–CFP relation,” with the large majority reporting positive findings.

Ready to align your money and your values? Thanks to the surging interest in sustainable investing, it’s easy for individual investors to get started.

As noted above, the first move might be removing exposure to organizations you don’t support. If you primarily hold index funds, you won’t be able to divest from specific companies. Luckily, sustainable funds are increasingly widespread; there are different options for investing in companies with high ESG ratings in the US, abroad, and in emerging markets. By choosing ESG-focused funds, you can invest responsibly — without the need to pick individual stocks.

If you want to really dive into sustainable investing, consider thematic or impact investments. You could, for example, consider an impact fund comprised of companies advancing the United Nations’ sustainable development goals. Or you could combat climate change with exposure to a low-carbon ETF, which seeks to track an index that overweights businesses with lower fossil fuel dependence.

It might make sense to take a closer look at what you’re supporting with your retirement portfolio. Check with your HR department for more information, and if sustainable options aren’t available, ask if it’d be willing to add some. As large-scale institutions — like your employer or your financial firm — are the investors who will really move the needle toward sustainability, it’s important for individual investors to make their voices heard.

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Investing involves risk, including possible loss of principal. This article was sponsored by BlackRock. BlackRock is not affiliated with Vox Creative.

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A fund’s environmental, social, and governance (ESG) investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. A fund’s ESG investment strategy may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards.

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