Soaring in the Right Direction
By Colette Powers
Sustainable investing is an idea that seems to be changing and gaining more interest — not just with environmentalists, but with institutional and individuals investors, as well.
Individuals might have leaned toward socially-responsible investing, which uses an exclusion approach by eliminating from a portfolio companies not aligned with a person’s values. For example, people might have stayed away from investing in companies associated with tobacco, alcohol, gambling or weapons. It’s believed this approach may negatively impact a portfolio by limiting its diversity.
There’s a shift from this exclusion approach to a more holistic approach. People have begun investing in companies that strive to make a positive social and environmental impact.
Sustainable investors analyze companies differently. They don’t just look at financial data, but expand their analysis to include environmental, social and governance factors — also known as ESG factors. These can include environmental policy and management, climate change strategy, health and safety, working conditions, board structure and business ethics. (1)
This shift was influenced by the financial crisis of 2008. Since then, investors have been more likely to want increased transparency regarding a company’s business model, culture and sustainability efforts. (2) With the tools of the digital age, information is more readily available to the average investor. (3)
In addition, there’s a growing belief that the corporate sector — and not just government and philanthropic organizations — should be held responsible to help solve global challenges the world faces. That thinking puts more emphasis on a company’s sustainability efforts. (4)
These companies may be rewarded for their efforts. Research has shown that companies with practices following standards set by the Sustainability Accounting Standards Board tend to outperform companies that don’t follow such practices. (5) According to Harvard research by Mozaffar Khan and George Serafeim, firms that adopt ESG practices may realize greater profits and higher stock values, while also improving their corporate reputations. (6)
So, both the company and the investor may benefit and feel their efforts and investments can make a difference.
Sustainable investors want to know that their investments are aligned with their personal values. Some people —are willing to pay higher prices to companies that have strong sustainable practices and company cultures they’re most comfortable with. (7)
Sustainable investors also like their investments to make a positive social and environmental impact, (8) and feel including sustainable companies in their portfolio expands its scope and possibly impacts outcomes. (9)
As the demand increases for companies to be transparent, adopt sustainable practices and have positive social and environmental impact, investors can sleep well at night knowing their investments make a difference. (10) SWM
Colette Powers is a Financial Advisor with UBS Financial Services Inc., 440 S. Warren St., Syracuse, NY 13202. Any information presented is general in nature and not intended to provide individually tailored investment, tax or legal advice. Investing involves risks and there is always the potential of losing money when you invest. The information provided may be deemed reliable; however, the accuracy and completeness is not guaranteed by UBS Financial Services Inc. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. As a firm providing wealth management services to clients, we offer both investment advisory and brokerage services. These services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information on the distinctions between our brokerage and investment advisory services, please speak with your Financial Advisor or visit our website at ubs.com/workingwithus. ESG Investing Risk – Environmental, Social and Governance factors may inhibit a portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. Underlying companies in a particular fund may not necessarily meet exemplary standards in all aspects of ESG performance; nor is any company perfect when it comes to corporate responsibility or sustainability. UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC.
(1) Investor Insights UBS Asset Management Titled Quick Takes – Beyond going Green, 7/17, page 2. (2) UBS CIO Wealth Management Research titled Doing Well by Doing Good, 5/29/16 page 5. (3) UBS Asset Management Article titled Invest Smarter, 3/17, page 5. (4) UBS CIO Wealth Management Research titled Doing Well by Doing Good, 5/29/16 page 5. (5) Source: Eccles, Robert G., Ioannis Ioannou, and George Serafeim. “The Impact of Corporate Sustainability on Organizational Processes and Performance.” Management Science 60, no. 11 (November 2014): 2835–2857. (6) Khan, Mozaffar and Serafeim, George and Yoon, Aaron S., Corporate Sustainability: First Evidence on Materiality, The Accounting Review, (November 9, 2016). (7) UBS CIO Wealth Management Research titled Doing Well by Doing Good, 5/29/16 page 5. (8) UBS CIO Wealth Management Research titled Doing Well by Doing Good, 5/29/16 page 5. (9) UBS AG, UBS Switzerland AG and UBS Financial Services, Inc. titled, To Integrate or to Exclude, Approaches to sustainable investing, 7/13/15, page 4. (10) UBS AG, UBS Switzerland AG and UBS Financial Services, Inc. titled, To Integrate or to Exclude, Approaches to sustainable investing, 7/13/15, page 4.