Recent scandals at Mylan, Theranos and Volkswagen underscore the impact that environmental, social and governance (ESG)1 issues can have on investment performance. But applying portfolio screens to weed out the bad actors is only one dimension of the ESG investment discipline.
On the flip side, there are positive opportunities created by secular trends in the economy that can add long-term growth potential to client portfolios. Sustainable infrastructure, smart utility grids, and urbanization are all themes playing out in markets across the world.
Investors align assets with personal values
In the U.S. more than three-quarters of investors we surveyed say that investing in companies that reflect their personal values is an important consideration in their investment decisions.2 The one population where the sentiment is strongest is those investors who work with a financial advisor. Within this group we find 76% who say it’s important to invest in companies that have a positive social impact – a figure that is 17% larger than those who don’t work with an advisor. The same group says it’s important to invest in companies with good environmental records (74%) and companies that are ethically run (86%).2
According to our research, this investment approach also has significant appeal to younger investors: 69% of Millennial investors say a good environmental record is important, while 92% of those in Generation X stress investment in ethically run companies.2 Actively pursuing companies that fit these characteristics is the essence of values-based investing. While this offers an opportunity to help strengthen client relationships by offering a closer, more personal connection to their investments, ESG may also require a longer-term investment horizon, which can be a solid counterbalance to emotional, short-term thinking.
A long-term view for short-term markets
An upswing in short-term market noise may call for investments in long-term trends to ease the emotional volatility that can accompany it. Smart use of agricultural land and water and meeting the needs of an aging population are two of many issues that will need to be addressed. Capital is likely to flow to those companies that can solve problems like these, creating opportunity for investors with a long-term outlook.
In an era that is marked by greater demand for asset managers to more closely align to their clients, ESG strategies may be one of the solutions that help financial professionals make their value clear to clients.
Putting the strategy to work
This is where getting to know clients better can help balance their portfolio goals with social and ethical concerns. Asking clients about what their money means to them and what they want wealth to accomplish are important parts of the equation. Understanding how they measure their ability to “help make the world a better place” or “enact positive change” can help to reframe investment discussions to be more purposeful.
It’s tempting to think that ESG is more likely to be a concern of higher-net-worth clients and family office practitioners. In reality, interest cuts across wealth bands and age groups. It’s a worthwhile conversation in what looks to be an uncertain world.
1 ESG investing focuses on investments in companies that demonstrate adherence to environmental, social and governance (ESG) practices; therefore, the Fund’s universe of investments may be reduced. It may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.
2 Natixis 2016 Global Survey of Individual Investors – Natixis Global Asset Management commissioned CoreData Research to conduct a global study of individual investors, with the goal of understanding their views on the markets, investing and measuring their progress toward financial goals. Data was gathered throughout February and March 2016. The study included 7,100 investors in 22 countries including 750 in the U.S.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
Diversification does not guarantee a profit or protect against a loss.
All investing involves risk, including risk of loss.
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