Sustainable Investing: A Fiduciary Win-Win

Sustainability is considered by many to be an antidote to chaos, introducing or perhaps restoring order to situations that threaten long-term survival. A well-known definition of sustainable development, coined by the United Nations in 1987, is “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

In keeping with that spirit, sustainable investing focuses on identifying companies and industries that are working to meet the needs of today’s consumers, but intend to create products and services that don’t deplete or destroy natural resources—thereby enabling future generations to care for their own needs. Some of these companies and sectors are dedicated to, for example, increasing and preserving clean water supplies and reducing carbon emissions.  

Advisors can help clients make sound sustainable investing decisions by incorporating environmental, social and corporate governance (ESG) screens into their investment due diligence and portfolio construction processes. Applying ESG criteria to portfolio management enables clients to utilize their assets for the greater good and often improves performance. From a fiduciary standpoint, it’s a win-win.

A growing number of advisors and investors are catching on—U.S. managed assets that invest using ESG and other socially responsible investing (SRI) criteria grew by 76% between 2012 and 2014, according to The Forum for Sustainable and Responsible Investment.

It’s easy to see why. According to research from Deutsche Bank’s DB Climate Change Advisors, which reviewed more than 100 academic studies on sustainable investing from around the globe, companies with high ESG and corporate social responsibility ratings tend to exhibit market- and accounting-based outperformance.                                

ESG criteria can also empower investors to reward companies that go the extra mile for the good and welfare of their employees. This emphasis on a positive and productive internal corporate culture falls under the “S” in ESG (social). For clients who wish to incorporate this factor into their investment decisions, advisors should look for companies that care about the happiness of their employees. When employees as a group are happy, they tend to be more productive for their employer, which not only improves that company’s corporate performance, but also elevates the impact it has on its local community.

Companies that are featured in “great places to work” lists and actively encourage employees to volunteer with non-profit organizations provide ideal ESG investment opportunities. Think about it—firms that sponsor initiatives where employees clean up public spaces, volunteer at food pantries, or serve meals for the homeless understand the value of a culture that emphasizes community involvement. In their own way, these companies are supporting sustainability.

ESG and SRI screens provide an actionable way for advisors to help their clients leverage their assets toward companies and initiatives attempting to make the world a better place for present and future generations. Simultaneously, advisors can also utilize ESG and SRI criteria to yield better investment outcomes—further demonstrating their commitment to acting in their clients’ best interest as fiduciaries. 

-Michael Mullins