Ann Marie Etergino
Ann Marie Etergino, CIMA, is a managing director – financial advisor in the Institutional Consulting Group at RBC Wealth Management in Chevy Chase, Maryland.
Mission-driven organizations may want their portfolios to reflect their social and cultural values. Here’s a primer to help organizations understand and implement an investment strategy that pairs purpose and profit.
The heartbreaking events of 2020 highlighted systemic issues locally and globally. We couldn’t watch TV or read the news without seeing a headline on wildfires and climate change, the pandemic and access to medical care, or social unrest and racial inequality. In response, a growing number of individuals and organizations are looking to influence positive change in the world by aligning their values with their investments.
Mission-based organizations are particularly interested in how they can design their investment portfolio for both purpose and profit. As one of our association clients explained, “The decision to invest our long-term funds to support the same goals as our grants and spending, without sacrificing returns, was a no-brainer.”
Responsible investing is an umbrella term encompassing the three approaches used to deliberately incorporate environmental, social, and governance (ESG) considerations into an investment portfolio, which are outlined below:
Responsible investing, often referred to as ESG investing, posits the idea that every company operates with some level of environmental, social, or governance risk and opportunity. By analyzing ESG risks and identifying ESG leaders, investors can hedge these risks and improve the performance of their investment portfolios. As such, we have found that high ESG value creates financial value.
One misconception about ESG investing is that investors will sacrifice performance in order to integrate ESG factors into a portfolio. This myth continues to be debunked: In a recent Morgan Stanley study [PDF] comparing ESG products to non-ESG products for 15 years between 2004 and 2018, the ESG products performed at least as well as traditional investment products across every asset class. In addition, a RBC Global Asset Management quantitative study [PDF] in July 2019 showed that investments with high ESG ratings have outperformed and been less volatile historically.
Data from Bloomberg (see chart below) shows more investors are addressing ESG concerns in their portfolios—monthly flows into ESG-focused exchange-traded funds (ETFs) jumped from $0.9 billion in January 2018 to more than $18.2 billion in January 2021, and the growth is showing no signs of slowing. To put that in perspective, total flows into equity ETFs totaled $56.7 billion in January 2021, thus ESG-focused ETFs accounted for approximately 32 percent of flows into equity ETFs that month.
As investors allocate record amounts into ESG-conscious funds, and more investment managers incorporate ESG factors into their investment strategies, it is important to understand the fundamentals of implementing an ESG portfolio.
The first step is to define your organization’s goals and select the ESG factors aligned with those goals. From sustainable growth, to environmentally conscious business practices, to emphasis on diversity and inclusion, any or all of these ESG factors can be expressed in a customized portfolio based on the organization’s mission and values.
For example, one health-focused association client emphasized how important it is for their members and donors to know that the association does not invest in industries that negatively affect health. ESG goals should also be documented in the investment policy statement.
The next step is to evaluate the investment options that are aligned with those selected ESG factors and also meet your organization’s risk-adjusted returns target. There will likely be a list of choices, given that the number and variety of ESG investment options are on the rise—as of Q4 2020, there were 4,153 sustainable funds available globally, according to Morningstar Direct. A financial advisor can be a great resource during this evaluation process.
Once your organization has designed a portfolio to meet both its mission and risk-adjusted return goals, seek the necessary approvals and documentation to implement the plan. Last, as is the case with all investments, the organization should review its portfolio periodically to ensure that investments continue to achieve their purpose and performance objectives.
Our message to all organizations is that ESG investing helps align your portfolio with your unique goals and values, thereby furthering the organization’s mission through investing while still positioning you to achieve your investment performance goals.
This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. Charts are for illustrative purposes and not intended to be representative of any specific investment vehicle. Past performance is not indicative of future results. Due diligence processes do not assure a profit or protect against loss. Like any type of investing, ESG investing involves risks, including possible loss of principal. © 2021 RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. All rights reserved.