There’s a growing trend among those who are interested in making a positive impact on their portfolio – and the environment and society around them. To accomplish these dual goals, which were often considered to be at odds with each other in the past, many savvy investors are actively seeking Socially Responsible Investments (SRI) and Environmental, Social and Governance Criteria (ESG) investments when making investment decisions.
Over the past two decades, more individuals have been pursuing opportunities for socially responsible or mission-related investing, which was previously only available to large institutions. As concerns surrounding the environment, sustainability, and data privacy have grown, so has an interest in ESG investing.
Aligning your values and financial goals allows you to make investment gains and, because you are simultaneously supporting causes that are close to your heart, you’ll feel good about those investments in more ways than one. Below, we’ll discuss how you can build a portfolio with a purpose.
You don’t have to make a choice between doing well financially and doing good in the world. The long-held suspicion that sustainable investing would not perform is being put to the test as improved screening processes evolve and greater numbers of investors are putting their money behind these funds. A 2018 Bank of America Merrill Lynch survey found that in the next two decades, there could be as much as $20 trillion of assets growth in ESG funds in the U.S. alone.
Another study conducted in 2015 reviewed 2,200 individual pieces of research from the past five decades, all of which looked at ESG factors in terms of corporate financial performance. The results of this aggregated research were favorable, with 90 percent of the studies indicating a positive or neutral financial performance for companies that use ESG strategies when compared with other companies.
And while it may be too soon to say with complete certainty, there is some evidence that companies who applied ESG criteria weathered the first year of the COVID-19 pandemic (March 2020-March 2021) more favorably than others. S&P Global analyzed 26 ESG funds and found that 19 of those grew by 27.3 percent to as much as 55 percent; the S&P 500 index grew by only 27.1 percent. These findings indicate that there may be a correlation between sustainability and stability in an uncertain market when it comes to investing.
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Consistent Performance and Controlled Risk
Speaking of stability, keeping risk exposure in check is a critical part of strategic investing. Incorporating companies with a high ESG score into your portfolio can provide stability and financial returns while limiting risk. In a 2016 study that compared risk for ESG companies and peer companies within 12 different industries, those companies adhering to ESG criteria experienced 28.6 percent lower stock return volatility than their peers.
The criteria guiding ESG decisions also provides another natural buffer against risk. Massive disasters that can significantly and negatively impact other companies are unlikely to occur for ESG companies. For example, the Exxon Valdez oil spill of 1989 was devastating for the company, resulting in an environmental and financial nightmare. This kind of event is unlikely to happen with ESG companies that, by virtue of their ESG status, would most often be precluded from negative environmental actions.
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A Growing Sense of Purpose
Investing to make an impact is an alluring prospect. Who wouldn’t want to back a company they feel aligns well with their own values? One way to do that is by diversifying your portfolio with the inclusion of ESG mutual funds and Exchange Traded Funds (ETFs) that can promote your ideals and drive change through your support.
As the demand for ESG investments grows among investors, particularly among millennials, women, and high-net-worth individuals, more investment opportunities are being created. In 2020, investors contributed more than $50 billion to sustainable funds, a $45 billion increase from 2015. While the trend is certainly being spearheaded by the millennial generation, a 2019 Morningstar report found that 72 percent of Americans expressed some level of interest in sustainable investing.