The enormous toll of COVID-19 on our health and well-being, mounting tensions over social disparities, and increasing market volatility have forced us to rethink many long-held assumptions. The crisis has exposed unsustainable practices and caused us to question the resilience of our markets. This widespread reassessment of the way we live our lives will undoubtedly have implications for the way we invest.
With the fastest 30%+ decline in history, 2020 has been a wake-up call for investors. The traditional approaches to asset allocation and investment selection seemed to break down as stable and defensive industries suddenly crashed. At the same time, sustainable investing seemed to be having a moment. In the first quarter of 2020, Morningstar reported 51 out of 57 of their sustainable indices outperformed their broad market counterparts, and MSCI reported 15 of 17 of their sustainable indices outperformed broad market counterparts. But what does sustainable investing mean?
The concept of sustainable investing can mean different things. There is often a lot of confusion surrounding sustainability, impact investing, or investing based on personal values and beliefs. Sustainable investing requires an investor to evaluate the financially material short-term and long-term risks and value creation of an investment. Generally, sustainable investments seek to mitigate the environmental, social, or governance risks (often referred to as ESG) faced by an organization. In many cases, the organization is also working to improve ESG conditions.
Investors often confuse personal values with those of sustainable investing. An investor may look to a sustainable fund to avoid sectors that clash with their values, and later discover those sectors within the fund. This confusion highlights a problem for investors seeking to align their investments with their values. Sustainability-focused funds attracted a record amount of capital in the first quarter of this year, even as the pandemic rattled worldwide markets. According to Morningstar, global sustainable funds saw inflows of $45.7 billion, while the broader fund universe had an outflow of $384.7 billion. Investors piling into these funds may be unexpectedly investing in industries or companies they had intended to avoid while excluding companies that fit their broader sustainability goals.
Looking at individual stocks to execute a sustainable investment strategy can also have unintended consequences. Companies are eager to point out their environmental efforts in marketing campaigns. However, it is often questionable whether their efforts have a material effect on their ability to do business. Additionally, investing in a company based solely on ESG impacts may lead investors to overlook unfavorable business conditions or financial practices.
The most effective way to align your investments to your values is through personalized portfolio management. We analyze the underlying holdings of sustainable funds and conduct in-depth research on individual companies to ensure your investments fit you…not the other way around. By focusing on your unique situation, we can help you develop a sustainable investment strategy for your future goals.
Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.