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[X] CLOSEMENU

Environmental Investment, Part 1

December 20, 2016

True confession…I know next to nothing about investments. I’ve more or less ignored what’s happening with my retirement plan, other than to pick a “conservative option”; I’m definitely risk averse. That being said, I do try to otherwise live my life in a socially and environmentally responsible manner. Not paying attention to my investments is probably not smart, and not only for the financial implications. I also think that in today’s political reality, socially responsible (SRI) or sustainable investing is one way to positively act to protect the environment.

Sustainable and socially responsible investing, in the form of environmental, social and corporate governance (ESG) mutual funds and other financial products, has actually been around for many years. According to Kiplinger, long-term sustainable investing is on the rise; and according to the most recent biennial report from US SIF: The Forum for Sustainable and Responsible Investment, more than one out of every five dollars managed professionally in the United States is invested using an ESG strategy. Kiplinger also cites a survey conducted by U.S. Trust, Bank of America Private Wealth Management, which found that one-third of millennials consider socially responsible factors when they invest. Certainly a good sign for the future of SRI.

Kiplinger states that there are now 181 U.S. mutual funds and 39 exchange-traded funds which practice SRI in one form or another. US SIF reports that it has “identified 300 money managers and 1,043 community investing institutions that incorporate ESG issues into their investment decision making.” Also according to US SIF, more than 1,000 funds now incorporate ESG criteria, a 12% increase since 2014.

Worried that you’ll lose your retirement savings by investing in socially responsible companies? According to Kiplinger, there’s no evidence that ESG investing “helps or hurts performance.” And, over the long run SRI most likely “evens out.” According to a 2016 report by Barclays Research, “a positive ESG tilt resulted in a small but steady performance advantage.”

Socially responsible investment seeks to recognize companies for their “good citizenship,” according to Kiplinger. Companies with high ESG scores are those which strive to be “mindful of their environmental impact; treat employees, customers and suppliers well; and have policies that align the interests of management and shareholders.” Typically companies which fall into this category include those in health and technology; companies in the industrial, materials, and utility sectors are not excluded, but a high bar for inclusion results from these sectors' environmental impacts.

Sustainable waste and materials management companies typically fall in the SRI category, naturally enough, as they focus on the management of waste as a resource.

SRI does bring a level of complexity to investing that prioritizing short-term financial returns avoids. Fund managers typically set about to proclaim certain stocks off limits. Under this strategy, for example, the TIAA-CREF Social Choice equity fund doesn’t include Apple due to concerns over its environmental practices and supply-chain standards on human rights. Nonetheless, it can be confusing to be a socially responsible investor when even practiced investors have difficulty determining which of the hundreds of companies contained in index funds meet ESG criteria.

More in Part 2, to be posted next week.

By Athena Lee Bradley (with contributions from Robert Kropp)

 

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