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Sustainable & Impact Investing

June 22, 2022

Sustainable & Impact Investing 101

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?

 

1 “Socially Responsible Investment.” Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/socially-responsible-investment-sri/.
2 Stankiewicz, A. “Sustainable Fund Flows Dip for the Quarter but Peak for the Year.” Morningstar, January 31, 2022.
https://www.morningstar.com/articles/1076648/sustainable-fund-flows-dip-for-the-quarter-but-peak-for-the-year

3 “Sustainable Signals: Individual Investors and the COVID-19 Pandemic.” Morgan Stanley Institute for Sustainable Investing (2021).
https://www.morganstanley.com/assets/pdfs/2021-Sustainable_Signals_Individual_Investor.pdf.
4 Ibid.
5 “Digging Deeper into the ESG-Corporate Financial Performance Relationship.” University of Hamburg, DWS (2018); “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds.” Morgan Stanley (2019).
6“Billion-Dollar Weather and Climate Disasters.” National Centers for Environmental Information, July 11, 2022. https://www.ncdc.noaa.gov/billions.
7 Kaplan, S., and A. Ba Tran. “Nearly 1 in 3 Americans Experienced a Weather Disaster this Summer.” The Washington Post, September 4, 2021.
https://www.washingtonpost.com/climate-environment/2021/09/04/climate-disaster-hurricane-ida/.
8 Smith, J. “What Boards Should Know About ESG Developments in the 2021 Proxy Season.” EY, August 3, 2021.
https://www.ey.com/en_us/board-matters/esg-developments-in-the-2021-proxy-season.
9 Henisz, W., T. Koller, and R. Nuttall. “Five Ways that ESG Creates Value.” McKinsey Quarterly, November 2019.
10 “Survey of CFA Institute Members on Latest ESG Matters.” CFA Institute, November 2021.
11 See www.cfainstitute.org/-/media/documents/survey/cfa-esg-survey-web.pdf for additional research on ESG and corporate financial performance.

 

 

This article is intended to be an unconstrained review of matters of possible interest to Glenmede clients and friends and is not intended as personalized investment advice. Advice is provided in light of a client’s applicable circumstances and may differ substantially from this presentation. Any opinions, expectations or projections expressed herein are based on information available at the time of publication and may change thereafter, and actual future developments or outcomes (including performance) may differ materially from any opinions, expectations or projections expressed herein due to various risks and uncertainties. Information obtained from third parties, including any source identified herein, is assumed to be reliable, but accuracy cannot be assured. In particular, information obtained from third parties relating to “ESG” and other terms referenced in this article vary as each party may define these terms, and what types of companies or strategies are included within them, differently. Glenmede attempts to normalize these differences based on its own taxonomy, but those efforts are limited by the extent of information shared by each information provider. Definitional variation may therefore limit the applicability of the analysis herein. Any reference herein to any data provider or other third party should not be construed as a recommendation or endorsement of such third party or any products or services offered by such third party. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss the applicability of any matter discussed herein with their Glenmede representative.