When you look at your investment portfolio, how does it make you feel? Do you see the companies you are invested in contributing to make the world a better place? With sustainable investing, you can put a focus on investing primarily in companies with practices and policies you believe in.
Not long ago, discussions about sustainability focused primarily on recycling bins and renewable energy. These days, sustainability reaches to all parts of the economy and our lives, including our portfolios. And unlike impressions from the past, sustainability and profitability are far from mutually exclusive as many investors believe sustainable considerations can positively affect long-term value.
Sustainable investing refers to a range of investment approaches that include environmental, social and governance factors as part of the overall investment process and approach. Such factors include environmental effects, worker treatment, product sourcing practices and corporate governance, among others. The overall objective of taking this approach is to gain a fuller understanding of investments in an effort to change the world for the better in the long-term. The expectation is that you should not have to give up returns to invest sustainably — rather, sustainable investments should perform comparably to or better than conventional equivalents. Worldwide, 50% of investors expect higher returns with sustainable investments and 32% expect equal returns, according to UBS Investor Watch. With the right direction and focus, sustainable investing allows you to build a portfolio you can feel good about.
If sustainable investing sounds like something you want to implement in your portfolio, consider which of these broad approaches resonates most with you. Keep in mind that sustainable investing is not philanthropy — the objective is to generate competitive returns, not give away money.
Exclusion investing: Exclusion is an approach that removes exposure to specific companies or industries that don’t align with your values. Common exclusions include alcohol, tobacco, weapons manufacturers and gambling-related businesses.
Integration investing: Integration approaches focuses on incorporating environmental, social and corporate governance (ESG) factors into the investment process, with the objective of enhancing one’s assessment of risks and opportunities. Integration investing may result in exposure to companies that don’t necessarily have a stated ESG focus, but which exhibit strong performance on environmental, social or governance metrics.
Impact investing: An expanding set of investment strategies aim to achieve intentional and measurable positive social or environmental change while delivering market rate or better returns. This investment style, called impact investing, is typically achieved through active fund manager involvement with companies — whether private or public — to achieve targeted change and deliver returns.
Investors can adopt full sustainable investing portfolios or incorporate individual equity or fixed income strategies into their existing portfolios over time. They can use any combination of the above sustainable investing approaches to shape portfolios in a way that meets their individual goals.
Building a portfolio
Sustainable investing is growing in popularity. A 2017 McKinsey and Company study found that more than 25% of all managed assets are invested with sustainability in mind and that the use of ESG integration specifically is growing at a rate of 17% per year. Fifty-eight percent of investors believe sustainable investing will be mainstream in 10 years, and adoption of sustainable investing is expected to grow significantly, from 39% of investors today to 48% over the next five years, according to UBS Investor Watch.
Sustainable investing is not an all-or-nothing proposition: You have the choice to take small steps toward sustainable investing with a few small changes in your portfolio or dive in with a more extensive approach.
But one thing is certain, your portfolio won’t become more sustainable unless you take action.
Michael Toth is senior vice president of wealth management for UBS Financial Services.