What is socially responsible and sustainable investing?

With sustainable investing, you invest your money in a socially conscious way.

Interest in the approach has grown in recent years, given increased acceptance that environmental, social and governance considerations can affect an investment’s performance, and because of changing investor demographics and preferences.

While some are motivated to improve their investment decisions, others want to align their portfolios with their values and personal views.

Perhaps you want to encourage better corporate behavior or make a positive environmental or social impact.

Regardless of your reason, there are many ways to invest sustainably. It’s important to work with your financial advisor to determine the best approach for you.

What are the different types of sustainable investments?

  1. Environmental, social and governance (ESG) investing
  2. Values-based investing

While both approaches may align with your values, there are some notable differences.

Values-based investing focuses on excluding or actively including investments targeting issues and causes that are important to you, while ESG investments consider a broader spectrum of issues and causes.

What is ESG investing, and what does it stand for?

ESG investing incorporates environmental, social and governance considerations along with traditional financial measures.

Environmental

  • Considerations include climate change, natural resource use and pollution.
  • Companies can reduce carbon emissions, invest in renewable energy, decrease pollution or conserve water resources to reduce environmental risks and create opportunities.

Social

  • Considerations include workforce well-being, product liability and social opportunities.
  • Companies can promote gender and pay equality, prioritize diversity and inclusion, have positive labor relations and safe working conditions for employees, and have strong cybersecurity systems.

Governance

  • Considerations include corporate governance and corporate behavior.
  • Companies can institute stronger ethics policies, provide transparency on their financial reporting and set accounting policies that reflect the state of the business.

How does ESG affect investment performance?

There is growing recognition that ESG-related risks and opportunities can affect a company’s financial performance and therefore an investment’s performance.

For example, a company that pollutes may be at higher risk of increased expenses from environmental cleanup costs. Alternatively, a company that has invested in renewable energy may represent a good investment opportunity as power generation shifts away from fossil fuel sources. As a result, many company management teams integrate ESG considerations into managing their businesses.

Likewise, many professionally managed investments, such as mutual funds and exchange-traded funds (ETFs), incorporate ESG considerations into their traditional investment analyses. They may do this by integrating it as one part of their overarching investment process, or they might have a primary and intentional focus on ESG as part of the objectives of the investment.

Those that integrate ESG considerations into decisions prioritize other goals (e.g., traditional financial goals) above ESG, and therefore the investments may not be marketed and viewed as sustainable investments. Many mutual funds and ETFs available at Edward Jones integrate ESG considerations but are not explicitly labeled as sustainable investments.

If you’re interested in an ESG intentional investment approach, you can invest in sustainable companies that meet the ESG standards you are comfortable with or invest in ESG intentional funds. ESG intentional funds prioritize ESG considerations alongside traditional financial measures and explicitly indicate some level of ESG consideration in their fund design. These funds generally have access to dedicated ESG research teams, leverage proprietary ESG data and investment processes, and engage with company management teams to push for what they believe to be positive change. Some mutual funds and ETFs available at Edward Jones are considered ESG intentional funds.

Can ESG investing provide competitive returns?

Some investors question whether ESG intentional investing can achieve competitive investment results.

The chart below compares a broad group of global companies (represented by a global equity index) with companies that have the highest MSCI ESG ratings.

MSCI is a reputable third-party ESG ratings provider that evaluates companies’ exposure to ESG risks and opportunities and their ability to manage them.

While all investments perform differently over time, the chart shows that from 2007 to 2021, the group of highly rated ESG companies performed about the same as the global equity index.

Source: Morningstar Direct. Index performance measured from 10/1/2007 to 2/1/2021. The global equity index is represented by the MSCI ACWI NR index. Leading ESG companies are represented by the MSCI ACWI ESG Leaders NR index.

This chart shows the performance of a global equity index and the leading ESG companies from 2007 to 2021. The line graphs illustrate that the group of highly rated ESG stocks performed about the same as the global equity index.

What is values-based investing?

Values-based investing helps align your portfolio with your personal values by excluding certain investments or targeting issues that are important to you.

However, there are potential risks or trade-offs with this approach. For example, you can exclude entire segments of the market, such as tobacco companies, or investments that engage in certain business practices, such as animal testing.

If you want a professionally managed approach, separately managed accounts in our Unified Managed Account program provide a diversified portfolio with the ability to exclude a reasonable number of specific companies or categories of companies based on your preferences.

Another values-based approach is to target issues that are important to you through your investments. If you are interested in climate change, you could invest in a fund designed to promote climate change issues through clean energy or solar companies. If you want to express religious views, you can invest in certain faith-based funds.

Will a values-based approach reduce returns?

Before choosing any investment, though, it’s important to understand its goals and objectives.

An investment may value nonfinancial goals more than financial returns. Also, introducing too many exclusions or focusing on a narrow area of the market may decrease your portfolio’s diversification and materially impact its risk and return.

Next steps for investors

  • Work with your financial advisor to determine if you’d like to focus on sustainable investing.
  • Decide how you want to include sustainable investments, recognizing that many mutual funds and ETFs available at Edward Jones integrate ESG considerations.
  • If you want to reposition your portfolio, talk with your financial advisor about the best way to adjust your portfolio in light of taxes and other costs.