Sensible Financial started offering “sustainable” investment portfolios in 2020. These portfolios can be more broadly categorized into what is referred to as ESG (Environmental, Social, and Governance) investing. In ESG investing, investors consider various environmental, social, and governance factors in addition to traditional investment characteristics. In a future article we will talk in more depth about what Sensible Financial means by sustainable investing, and how it fits into the broader ESG landscape.
Since Sensible Financial started offering sustainable portfolios, about 29% of our clients have decided to use them. Many of these clients are taking a measured approach, buying sustainable investments with dividends and new funds and in retirement accounts – not realizing capital gains to make the change. Other clients are thinking about it. This article talks about the reasons that some clients are deciding to select our sustainable portfolios.
What do clients think about sustainable investing?
In discussions with clients, three perspectives stand out.
- Some clients are not at all interested. These conversations tend to be short, and we have not gathered much feedback on why these clients are not interested.
- Other clients find the idea intriguing but want to know more. Typically, they wonder whether there is a cost in terms of expected investment returns, or in realizing capital gains if they transition to a sustainable portfolio. Others want to know if the investments align with their definition of sustainable (more on this in an upcoming article).
- The last group is very interested and wishes to transition their portfolio. For most of these clients, financial considerations appear to be secondary to values-based considerations.
Rationales for sustainable investing
This section outlines two of the most prominent of several rationales for sustainable investing.
For some clients, the concept appeals because they believe their capital holds power, and they want to use that power in a way that aligns with their values. They do not want to support or profit from businesses to which they object, and they do want to support businesses of which they approve.
There is another way to think about it, which is somewhat closer to a traditional investing approach. Traditional approaches would typically look at profitability, growth, the attractiveness of a company’s products, how well insulated the company is against competitive threats, etc. Here, we’d add sustainability considerations to the list. This approach considers sustainability factors to be risks. In this perspective, companies preparing for those risks may have more profitable and less risky futures and thus be better investments.
Some clients, particularly those on the fence about sustainable investing, ask whether incorporating sustainability factors will hurt their investment returns. There have been many studies of this topic, with various conclusions. Unfortunately, answering this question is very difficult because proper investment analysis is done over many market cycles, and sustainable investing is a relatively new phenomenon. In addition (as we will discuss in a future article), there are many approaches to ESG investing, making the analysis even more difficult.
However, we can look at investing results over shorter periods of time to see how Sensible Financial’s approach to sustainability might have fared. When we review our sustainable portfolios and apply the current portfolio management approach to the past, we find that the sustainable portfolios would have matched or slightly outperformed our standard (i.e., “non-sustainable”) portfolios over the last 5 and 10 years[i]. There are many caveats to this observation, including that some of the mutual funds in our sustainable portfolios did not exist for part of the time periods we looked at. Furthermore, there is certainly no guarantee that this performance pattern will continue. However, at least in the recent past, our return estimates suggest sustainable investors would not have suffered financially from this choice. It is worth saying that this is one example where sustainable investing did not detract from performance, but it is only one example and is far from definitive.
Does sustainable investing make a difference?
Another question we sometimes hear is whether sustainable investing really makes a difference in how companies operate. The actions of an individual investor probably don’t make a difference, just like one driver moving to a hybrid or electric vehicle wouldn’t make a noticeable difference in carbon pollution. However, if enough investors move in a sustainable direction, it could make a difference. Fewer investors for a company increase the cost of capital for that company, making it more expensive for them to do business. If that happens in a significant enough way, those companies might alter their behavior. There is also a second way to think about this. If sustainable investors become a large enough part of the market, then boards and CEOs of companies will take notice. They might change their practices, even in the absence of solid proof that their cost of capital has been affected.
Growth of ESG Investing
ESG investing has been growing, and like many fields that are early in their lifecycle, there are many approaches. We will talk about this in our next article.
If you’d like to know more about Sensible Financial’s sustainable investing strategy, please contact your Sensible Financial advisor.
[i] Past performance is no guarantee of future results. All investing involves risk, including the potential for loss of principal.