Misperception 1: Sustainable, responsible, and impact investing (SRI) results in lower returns.
Research studies demonstrate that companies with strong ESG policies, programs and practices are sound investments. A 2015 meta-study conducted by Oxford University and Arabesque Partners, which categorized more than 200 sources, including academic studies, industry reports, newspaper articles and books, found that "88 percent of reviewed sources find that companies with robust sustainability practices demonstrate better operational performance, wich ultimately translates into cash flows." Furthermore, "80 percent of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance."
A 2015 report by the Morgan Stanley Institute for Sustainable Investing found that "investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments." This is on both an absolute and risk-adjusted basis, across asset classes and over time, based on its review of US-based mutual funds and separately managed accounts. For more on performance and SRI, please see www.ussif.org/performance. For additional research studies, please see www.fsinsight.org—a compendium of all the major academic studies on SRI.
Misperception 2: SRI investing includes only negative screening.
SRI encompasses a number of investment approaches, but can be categorized into two broad strategies.
One is ESG incorporation, which considers environmental, community, other societal or corporate governance (ESG) criteria in investment analysis and portfolio construction. ESG incorporation can be accomplished in numerous ways:
- Positive/best-in-class: Investment in sectors, companies or projects selected for positive ESG performance relative to industry peers. This also includes avoiding companies that do not meet certain ESG performance thresholds.
- Negative/exclusionary screening: The exclusion from a fund or plan of certain sectors or companies involved in activities deemed unacceptable or controversial.
- ESG integration: The systematic and explicit inclusion by investment managers of ESG factors into traditional financial analysis.
- Impact investing: Targeted investments, typically made in private markets, aimed at solving social or environmental problems.
- Sustainability themed investing: The selection of assets specifically related to sustainability in single- or multi-themed funds.
Community investing—investment that directs capital to communities that are underserved by affordable financial services—also falls under the rubric of ESG incorporation.
Shareowner engagement is the other principal approach to SRI. It involves the actions sustainable investors take as asset owners to communicate to the managements of portfolio companies their concerns about the companies’ ESG policies and to ask management to study these issues and make improvements. Investors can communicate directly with corporate management or through investor networks. For owners of shares in publicly traded companies, shareholder engagement can take the form of filing or co-filing shareholder resolutions on ESG issues and conscientiously voting their shares on ESG issues that are raised at the companies’ annual meetings.
Misperception 3: SRI involves only public equity investments.
Sustainable, responsible, and impact investing strategies are employed across all asset classes, including public equities, fixed income and loan funds, real estate and private equity. Alternative investments incorporating SRI strategies identified by the US SIF Foundation totaled $206.3 billion in 2016, according to the US SIF Foundation’s 2016 Report on Sustainable and Responsible Investing Trends in the United States.
Misperception 4: SRI is not consistent with fiduciary responsibility.
Incorporating ESG criteria into investment analysis is consistent with fiduciary responsibilities. Global law firm Freshfields Bruckhaus Deringer concluded in a 2005 study that “the links between ESG factors and financial performance are increasingly being recognized. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.” In 2015, a follow-on report to the Freshfields study was produced by the Principles for Responsible Investment (PRI), United Nations Environment Programme Finance Initiative (UNEP FI) and the United Nations Global Compact. The authors, informed by interviews with policymakers, lawyers and senior investment professionals, concluded that “[f]ailing to consider long-term investment value drivers, which include environmental, social and governance issues, in investment practice is a failure of fiduciary duty.”
US regulators have also weighed in on the implications of the Employment Retirement Income Security Act (ERISA) regarding SRI. In October 2015, the US Department of Labor rescinded a 2008 bulletin that discouraged investors from considering environmental and social factors in the companies in which they invest. The Department of Labor bulletin on Economically Targeted Investments, 29 CFR 2509.08-1, issued in October 2008, arbitrarily disfavored the consideration of environmental and social risks and opportunities in assessing potential investments. The new Interpretive Bulletin brings ERISA guidance in step with today's realities by noting that "fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors." See the US SIF press release here.