As investors plan their portfolios for the year ahead, those who are looking to incorporate environmental, social, and governance strategies should keep in mind a few reasonable expectations about sustainable investments.
Jon Hale, head of sustainability research for the Americas at Morningstar, highlights four key factors that investors should consider before diving head first into ESG or sustainable investments.
For starters, Hale argues that sustainable investing is not just one thing, as the theme represents a range of specific investment approaches that investors can use to enhance competitive investment returns while generating positive outcomes for people and the planet along the way. Consequently, investors should not assume that terms like “sustainable” or “ESG” are all the same.
As with all investments, it is important for investors to look under the hood. Some funds avoid exposure to certain non-sustainable sectors like crude oil altogether. Others follow “best-in-class” environmental, social, and governance standards, so fossil fuel companies can make it into these portfolios based solely on a single factor like high governance.
Secondly, Hale believes that sustainable investing continues to evolve and innovate. He explains that we are now in an environment in which investors increasingly anticipate that companies will make money while avoiding costs associated with negative social or environmental consequences and instead generating positive impacts.
“Rather than focusing solely on how ESG risks may affect an investment, more sustainable investments are also assessing the impact of an investment on people and planet,” Hale says.
Thirdly, Hale states that sustainable investing should deliver competitive investment performance. Sustainable investments aren’t just a feel-good strategy, as they should deliver returns to boot.
“Sustainable investors should neither expect to always outperform nor to always underperform, but they should expect investment returns that are competitive with those of conventional investments,” Hale says.
Lastly, Hale adds that sustainable investments are primarily returns-focused, but they can have a broader impact. Sustainable investing should have an impact on the world.
“By making a sustainable investment, you are having more impact with your money than if you invested in a conventional way,” Hale notes.
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