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All sustainable investment approaches are the same...
There are a variety of ways in which sustainability considerations can influence investment mandates and portfolio management.
To summarise the three most common approaches:
Traditional ethical investing focuses on excluding a set of industries or companies based on controversial behaviour, often called the “sin stocks”. To do this, investment strategies will apply a values-based negative screen on industries like tobacco, alcohol, or pornography. The rest of the strategy is then managed with traditional investments.
ESG investing introduces information on how well companies manage relevant operational ESG factors into the investment decision-making. Investment strategies can integrate this information differently. Common approaches may overweight or set inclusion thresholds based on company ESG performance, relative to peers.
Impact investing focuses on creating material, measurable positive impacts on people & planet. Instead of being a relative assessment, such as ESG, the focus here is on maximising the absolute positive impact associated with investments. Investment strategies can do this by positively targeting sustainable themes like clean water, renewable energy or accessible healthcare.
All sustainable investment approaches are the same.
Sustainable investing will sacrifice investment returns...
There is mounting evidence that sustainable investing does not sacrifice performance, in fact, incorporating ESG factors into investments can help boost financial performance. Overall, businesses that demonstrate greater operational sustainability (ESG) and sustainable products & services, can perform better.
Evidence indicates that the positive correlation between sustainability and performance holds both at the corporate accounting, and investment performance level. The reasoning is that businesses managing E, S and G better than peers demonstrate better risk control and compliance, suffer fewer severe incidents (e.g. fraud, environmental spill litigation) and ultimately carry lower tail risk. Additionally, ESG leaders invest more in Research and Development, foresee future risks and plan ahead to remain competitive.
Impact investing also offers the opportunity to capture the potential upside from competitive advantage, sustainability trends and legislative support. Impactful companies are those that have turned the largest societal challenges into profitable business opportunities. These companies benefit from the growing global demands for their products and services, greater regulatory support and from avoiding reputational and stranded asset risks. A recent example is the EU pandemic recovery package that demarcates special financial support for green economic activities.
Market evidence is also accumulating – showing superior returns of many sustainable strategies over their traditional equivalents. At EQ Investors, the Positive Impact Portfolios have been our best performing portfolio range, beating their benchmark for each of the nine years since their inception.
Sustainable investing will sacrifice investment returns.
Sustainable investing is too risky...
It is true that many high-impact investments can be located in more volatile markets (e.g. emerging markets), but real opportunities exist from small to large companies, equity, debt and real assets – and risks vary between these. For example, social housing investments can provide reliable government backed income streams while providing significant societal benefits. Water utilities prevent industrial wastewater from polluting natural ecosystems, and also provide defensive investment characteristics.
Therefore, portfolio managers like EQ Investors are able to adhere to normal risk categories and create portfolios for different ‘risk appetites’ of charity endowment mandates, as well as tailor these to sustainability preferences.
While long track-record data is not yet available across all risk categories for the aggregated impact investment sector, we have evidence that EQ’s Positive Impact Portfolios have shown better risk-adjusted returns than their conventional benchmarks since their inception (i.e. factoring in volatility). To us this supports the opinion that by investing in well-managed businesses that target long-term needs, some potential higher short-term volatility is worth the sustainable returns. However investors should be aware past performance is not a guide to future performance and that the value of investments and any income derived from them may go down as well as up and they may get back less than was invested.
Sustainable investing is
Sustainable investing cannot actually make a positive impact...
When investing through traditionally managed portfolios, disregarding the impact of investments on people & planet can contribute to business activity that actively works against the client’s values. On the other hand, investing a client account through a positive impact mandate, the output of companies and that associated with an investment can align with the client’s values.
Even in listed markets, allocating equity capital or investing in bond issues of businesses that create positive sustainable impact, will support their share price and provide easier access to capital thereby producing a license to operate. Using capital to invest for positive impact will signal to the market that such non-financial impacts are valued and nudge laggards in the right direction.
Additionally, sustainable investors will use their company relationships to engage boards on any sustainability weaknesses and thus create change. They are also able to use voting rights to back or block strategic decisions that concern the company’s ESG performance.
Sustainable investing cannot actually make a positive impact.
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