Curtis Financial Planning

Sustainable Investing Simplified

Over the years, the nomenclature around sustainable investing has morphed to the point of confusion. Besides “sustainable,” other descriptive terms for this investment style include environmental, social, and governance (typically referred to as ESG), socially responsible (SRI), and impact investing. You may also see the terms green, values-based, climate, intentional, or personal investing used to describe this investment approach.

While the terminology may vary, there’s a common theme inherent to this investment style. People who invest sustainably not only want to grow their wealth, but they also want to support their values with their capital.

What is Sustainable Investing?

In traditional stock analysis, investors evaluate a variety of fundamental factors to determine a stock’s expected return. For example, they may look at a company’s earnings and growth prospects to determine if it’s a good investment. The underlying belief is that if a company is profitable, its investors should profit as well. Unfortunately, traditional investment analysis doesn’t consider how a company makes its money.

A sustainable investment approach takes traditional analysis a step further by including environmental, social, and governance factors in the analysis. The goal is to reward companies that not only take care of their investors and stakeholders, but that also care about their employees, the planet, and society in general.

Indeed, numerous studies have found that companies that score well on ESG factors perform better over time. Since many of us are investing with a long-term view for retirement, investing in companies that operate responsibly can be both financially and personally rewarding.

Let’s take a closer look at the individual elements of ESG:

In many cases, ESG can be used interchangeably with sustainable investing. Here’s a deeper look into each ESG factor.

The E, which stands for environment, measures how a company uses energy and resources. Today, carbon emissions and climate change are critical environmental issues encompassed in the E analysis.

S stands for social and addresses employee and labor relations, diversity and inclusion, and reputations fostered between people, institutions, and communities.

G, or governance, refers to a company’s internal system of practices. In other words, it considers the procedures a company follows to govern itself, make effective decisions, comply with the law, and meet its stakeholders’ needs.

Unfortunately, analyzing securities for these criteria can be challenging since there aren’t uniform ESG reporting standards yet. However, as investor interest grows, so has the industry that rates companies for ESG performance. This trend suggests the future of ESG investing may offer greater opportunities for investors who wish to align their investments with their values.

How to Invest Sustainably

Investor interest in ESG investments hit an all-time high during the Covid-19 pandemic. In fact, Morningstar reported that ESG funds captured $51.1 billion of net new money from investors in 2020—a record and more than double the net inflows in 2019.

As interest in responsible investing gains momentum, sustainable investment strategies are increasingly becoming more accessible to individual investors. Whereas options were once constrained to mutual funds, there’s now a wide variety of ESG exchange-traded funds (ETFs) available. Specifically, the number of sustainable mutual funds and ETFs available to U.S. investors rose 30% year-over-year in 2020, according to a report issued by Morningstar earlier this year.

In addition, ESG strategies are no longer limited to stock funds. There’s also a growing number of options entering the ESG bond fund universe. Meaning, investors can now incorporate sustainable investment strategies across their entire asset allocation if they want.

Women and Sustainable Investing

Interest in sustainable investing appears to be growing among all types of investors. However, women have long led the charge in ESG investing since values-based investment strategies entered the scene.

For example, a recent client survey conducted by RBC Wealth Management found that women are more than twice as likely as men to say it’s extremely important that the companies they invest in integrate ESG factors into their policies and decisions. Another report from Cerulli found that the majority of women in the U.S. under age 60 favor ESG investing. 

Why do these statistics matter? Today, more than half of women in the U.S. are the primary breadwinners in their families, according to research from Prudential. And 30% of women surveyed are married breadwinners who are producing more than half of their household income. In other words, as our financial power grows, our investment decisions can have a greater impact on how companies address environmental, social, and governance issues.

At Curtis Financial Planning, we help you invest in strategies aligned with your values, so you can feel better about your financial decisions. Please get in touch if you’d like to learn more. We’d love to hear from you.  

In the meantime, if this brief primer on sustainable investing interests you, please take this survey. You’ll find out what issues you care most about when it comes to your investment dollars.

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