More people than ever are investing in ESG mutual funds that contain companies that operate in a way that upholds certain environmental, social or governance values.
It’s not that ESG investing is new. The first sustainable mutual fund hit the market in the 1970s. But 2020 is shaping up to be the year for socially responsible investing.
The value of an investment is no longer just about returns. An increasing number of investors are also calling for their money to make a positive impact on society and the world at large.
In fact, socially responsible investing and one of its subsets, impact investing, accounted for more than $1 out of every $4 under professional management in the U.S., according to a 2018 survey by the U.S. Forum for Sustainable and Responsible Investment. This amounts to over $12 trillion in assets under management yearly.1
Accompanying the growing demand is a proliferation of funds and strategies that integrate ethical considerations into the investment process. Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are industry terms often used interchangeably by clients and professionals alike, with the assumption that they all match in meaning and approach. However, distinct differences exist that will affect how client portfolios should be structured and which investments are suitable for meeting social impact goals.
What investors have discovered is that socially conscious investing isn’t just a way to align your values with your investment dollars; it’s also a strategy that delivers superior returns.
McKinsey & Company study has been studying the correlation between gender, ethnic and cultural diversity and financial outperformance for years. Its analysis shows that the business case for committing to diversity has grown stronger over the years. Its 2019 analysis found that “companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile — up from 21% in 2017 and 15% in 2014.”
That positive correlation has trickled down to investors’ portfolio returns. In the past two years ESG stocks (as measured by the MSCI USA ESG Leaders Index) have outperformed the S&P 500 index. And since the beginning of 2020, they’ve returned 8.3% versus the S&P’s 5.3% return.
What’s interesting about the surge in interest — and money — into ESG investing is that it’s consumers, not institutional investment firms, driving the trend.
One of my favorite socially responsible investment companies is Nia Impact Capital, which Kristin Hull runs. Their strategy is to apply both a gender lens and a commitment to racial equity across their investment-making decision process and live their values as a women-led team of activist investors.
I encourage you to invest in companies and funds that align with your values.
If you want to talk more about socially responsible investing, feel free to schedule your free 20 minute discovery call with me.