What is sustainable and impact investing?

Sustainable and impact investing is an umbrella term to describe a spectrum of approaches that use environmental, social and governance (ESG) information to make more informed investment decisions and create impact.

• Sustainable investing is the concept of using ESG information in an investment process to identify more sustainable long-term companies and to mitigate risk, avoid harm or position toward opportunities. The foundation of sustainable investing is ESG integration, which is the consideration of material ESG factors as part of the traditional investment decision-making process.
• Impact investing, on the other hand, means aligning values with investments for measurable financial and social return; a measurable, targeted impact outcome is a primary goal, alongside financial returns.

Between these approaches are strategies that use ESG information to make more informed investment decisions while also generating impact as a byproduct.

The evolution of sustainable and impact investing

Sustainable and impact investing traces its roots to the 17th century when Quaker individuals refused to participate in profiting from the slave trade.¹ Since then, the industry has expanded far beyond divestment techniques (Figure 1). Today, investors can construct portfolios leveraging a sophisticated range of tools, such as positively tilting toward companies demonstrating high ESG profiles and investing in companies exhibiting significant improvement in ESG issues, like an oil and gas company leading the transition to a low-carbon economy.

Growth of sustainable and impact investing

The number of sustainable funds — mutual funds and exchange-traded funds (ETFs) that state in their prospectus the incorporation of ESG information — has been rising in recent years, with assets in sustainable funds topping $357 billion as of December 31, 2021. In total, U.S. sustainable funds netted nearly $70 billion for the year, a 35% increase over 2020’s high-water mark.²

Top sustainable and impact investing areas of interest

Though sustainable and impact investors vary in their motivations and thematic areas of interest, three key topics have dominated this space in recent years:

• Climate change. As of fall 2021, severe weather had cost the U.S. more than $100 billion,⁶ with one in three Americans experiencing a severe weather disaster in the summer alone.⁷ The Biden administration is addressing the impact of climate change, with announcements that the federal government will target carbon neutrality by 2050 and extensive investments in clean energy, electric vehicle charging stations and water sanitation. Investors are exploring tactics from slashing emissions through divestment, investing in climate innovation and integrating climate considerations into corporate strategy and executive compensation.
• Diversity, equity and inclusion. Companies are facing scrutiny for their reactions to the COVID-19 pandemic and what lasting changes will look like in the recovery, including flexible work arrangements and strategies to address rising inequality among women and communities of color in the workplace. Given a significant rise in shareholder resolution activity requesting diversity demographic details as well as data on hiring, retention and promotion rates for women and people of color,⁸ investors are increasingly seeing enhanced frameworks for evaluating a company’s ability to offer an inclusive culture. This is yet another area where recent studies have shown clear linkage to strong corporate financial performance.⁹
• Fiduciary considerations. A recent CFA Institute survey found 62% of respondents noted a perception of “greenwashing” and the need for more succinct definitions around what constitutes a “sustainable” fund, while more than 50% noted the need for more clarity on how such investments fit with fiduciary duty.¹⁰ In lockstep, the Securities and Exchange Commission is placing greater scrutiny on asset managers touting themselves as sustainable and is requesting companies disclose climate change and human capital datasets. Additionally, the U.S. Department of Labor is re-evaluating how retirement plans that have typically not engaged with ESG strategies might do so. This may prompt greater adoption of sustainable and impact investing approaches by retirement plan fiduciaries.

Conclusion

The sustainable and impact investing industry is evolving quickly, spurred by a growth of cross-generational interest and a body of research supporting a linkage between ESG information and financial performance.¹¹ Investors with a range of motivations and thematic areas can use sustainable and impact investing strategies to construct portfolios to position them for a transforming world. Those interested in Glenmede’s Sustainable & Impact Investing platform can find more information in the Appendix on page 4 and on our website.

Appendix

Want to learn more about sustainable and impact investing?

• Glenmede’s Sustainable & Impact Investing Capabilities brochure details our approach, platform offerings and resources. Please email SustainableandImpactInvesting@glenmede.com to request a copy.
• Glenmede’s S&I Investing thought leadership page features several articles of interest:
• 2022 Sustainable & Impact Investing Outlook: Reimagining the Future: Discusses the three themes we believe will drive investment opportunities and societal impact in 2022: climate change, from the boardroom to the kitchen table; the future of work in the “new normal,” exploring how corporations are redesigning the workplace and quality jobs to ensure resilient, innovative, secure and inclusive companies; and the collision of ESG interests and fiduciary standards.
• Climate Change: Harnessing the Power of Public Capital Markets: Focuses on the growing public and regulatory pressure and how it is increasing the availability of climate risk data and analytical tools, as well as how incorporating climate risks in investment analysis is likely to raise pressure on public companies to reduce their carbon footprint.
• Racial Equity Investing: Opportunities for Impact & Alpha: Looks at how racial equity investing provides opportunities to advance racial equity and tackle racial inequities in the U.S. while generating financial returns.
• Sustainable & Impact Investing: A Taxonomy of Approaches & Considerations for Fiduciaries: Provides a view of how fiduciaries may grapple with an evolving set of standards in this space.
• Gender Lens Investing in Public Markets: It’s More Than Women at the Top: Explores the materiality of five dimensions of gender equity: women in leadership, access to benefits, diverse supply chains, pay equity, and talent and culture.