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Social welfare 23 May 2019

How sustainable investing can impact your portfolio

Investors who want to put their money where their ethics are — to realize potentially attractive returns while supporting environmentally sound and humane business practices — may choose from a variety of financial instruments that align with these goals.

Values-based investing, or sustainable, responsible and impact investing (SRI), aims to integrate environmental, social and governance (ESG) concerns into investment choices.

This SRI approach — also known by terms including socially responsible investing, impact investing or green investing — seeks to "generate long-term competitive financial returns and positive societal impact," according to the Forum for Sustainable and Responsible Investment.

By the end of 2017, at least $12 trillion, more than a fourth of assets under professional management in the United States, had been directed to investments based on these socially responsible principles, according to the forum.

Sustainable investing strategies work together to encourage responsible business

"Sustainable investing strategies work together to encourage responsible business practices and to allocate capital for social and environmental benefit across the economy," the group says.

Socially responsible investment choices include alternative mutual funds and exchange-traded funds that have been screened based on environmental, social and governance standards, and enterprises that serve vulnerable communities.

Depending on their particular priorities, socially responsible mutual funds or ETFs might screen out tobacco, alcohol, gambling or gun stocks, or companies with troubling records in terms of child labor, discrimination or the environment — directing investments instead to businesses focused on good corporate citizenship.

The concept has attracted institutional and individual investors, the Global Impact Investing Network (GIIN) notes.

"Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals," with most seeking competitive returns, GIIN says.

Social-impact investors aim to support ventures in areas such as sustainable agriculture and energy, microfinance, and affordable housing, healthcare and education, the group explains. Investors can realize healthy financial rewards by backing sustainable firms.

Portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return...

A 2018 GIIN investor survey found that "portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets and the market as a whole."

And a 2014 Harvard Business School study found that "high-sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance."

In addition, Morningstar studies have found that investments screened for environmental, social and governance benchmarks perform well. ESG indexes "favor companies with healthier balance sheets, stronger competitive advantages and lower volatility than their mainstream counterparts," the firm said recently on its blog.

The United National Global Compact, which describes itself as the world's largest corporate sustainability initiative, names 10 principles covering human rights, labor, environment and anti-corruption that companies should incorporate into their policies and practices to uphold "their basic responsibilities to people and planet," and to set the stage for long-term success.

Individuals can participate in this movement through socially responsible funds that allow them to support people and planet, along with a successful personal financial strategy.