As investors begin paying more attention than ever to where their money goes once it leaves their pockets, local experts say sustainable investing will continue to gain steam in the finance industry.
“There’s just a massive amount of momentum in this space,” said Jason Akridge, vice president and senior financial advisor with Integrity Wealth Advisors in Colorado Springs. “Absolutely, I think companies are paying attention to it, and it will become more and more prevalent over time.”
Sustainable investing is an umbrella term that encompasses a variety of strategies, including socially responsible investing and environmental, social and governance factors (or respectively SRI and ESG), Akridge said. The concepts are not new, he said. Business historians have found groups of people concerned about industries’ impact on the environment and pollution dating as far back as the Industrial Revolution, when consumption of natural resources dramatically increased.
“It was easy for them to talk about their convictions, but it was very hard to invest with those convictions in mind, especially for those that weren’t super affluent,” Akridge said. “People have been asking for it for a long time, but just given the advances in technology and research and available data, it’s becoming easier for people to be able to invest that way.”
SRI VS. ESG
Socially responsible investing initially developed as a way for investors to avoid companies whose ethics or values did not align with their own. Tobacco, alcohol and gaming were among the first industries to see their bottom lines take a hit from that method — often called “divestment” — in the early 20th century, according to financial services company Raymond James Financial.
The divestment approach has recently gained popularity among students determined to see college endowments back other energy sources as alternatives to fossil fuels, said Christopher Long, a certified financial planner with Breglio, Long and Associates Wealth Strategies in Colorado Springs.
“Divestment is a big buzzword in the institutional world,” said Long, who also serves on the Fort Lewis College Investment Advisory Committee in Durango. “Students are trying to have different endowments reflect their values, but they also view it as a way to exert pressure or influence on energy companies.”
Conversely, ESG investing allows investors to evaluate companies based on other factors such as public transparency, shareholder honesty and environmental stewardship, Akridge said.
“Before this was ever a well-defined marketplace, many managers were already utilizing those types of approaches as a risk management tool,” Long said. “When you think about it, if you’re not a good steward of the environment, you potentially have risks already.”
As markets evolve worldwide, investors are beginning to realize they sometimes must go beyond merely excluding entire industries they view unfavorably and instead take a closer look at how individual companies spend money, Long said.
“If you’re a stock owner, you have a spot at the table, so to speak, versus the divestment approach of, ‘We’re just not going to invest there and that’s how we’re going to pressure them,’” Long said. “The problem is, the investment universe is so large that that approach is not having the type of impact that people might have hoped. Institutions have driven a lot of that change because they’re the ones that have said, ‘Exclusionary isn’t making the most sense for me.’”
Taking a more nuanced look at companies’ practices and values often helps investors better shape the positive social change they desire, Long said.
“If you look under the hood, many of the biggest oil companies are driving the change away from fossil fuels and more,” he said. “An integration approach might look at some of the energy companies and say, ‘Yeah, their historical lines of business don’t necessarily line up with this, but we can see they’re making a positive impact in this area and we want to go along for the ride with them.’”
The jury is still out on which strategy provides a better return for investors, Long said. However, he said, a number of studies indicate a better trade-off for investors when they consider other factors such as the treatment of employees, following human rights principles set forth by the United Nations, and diversity among management positions.
“As these things become more important to a society, companies need to be proactive rather than reactive,” Long said.
Do the RESEARCH
Despite the surge in popularity, sustainable investing is still not part of every conversation financial advisors have with their clients, Akridge said. Advisors are still researching the best ways to tailor socially conscious investment packages to clients’ individual values, he said.
“When you start digging into these investments, they’re not quite as specific as to what we would need to present to our clients,” Akridge said. “Each company has their different definitions for it. One socially conscious fund may want to exclude companies that are into tobacco and firearms, while there may be another company that wants to exclude the areas of abortion and alcohol.
“To us, it’s a bit of a catch-all as opposed to being able to invest to each of our clients’ individual convictions, because they vary.”
Figuring out how certain corporations make money is much more straightforward than it was 15 or 20 years ago, but it can still sometimes be challenging for both investors and advisors, Akridge said.
“Sometimes with multinational companies, it’s surprising what different revenue streams they have,” he said. “But there has been an explosion of new rating systems, so if an advisor like me is curious, we can go to a number of sources to determine if we want to invest.”
It is an exciting time for clients who want to look beyond business metrics when determining where to invest their money, Akridge said.
“There has been a big shift in our industry, where 15-20 years ago, most advisors were looking at business metrics when they were looking at investments,” he said. “My industry, when they see a demand for a new type of product, they race to meet that demand.
“It’s a good thing for the world because investors can now invest to their convictions, along with seeing their portfolio grow.”