Overview of Sustainable Investing Landscape
MB+M Wealth Creation Team brings you an informative article from Morningstar (provider of investment research and management services) on a very topical subject – Sustainable Investing. The article, overview of sustainable investing landscape, walks you through:
- What is sustainable investing?
- What do the terms mean
- Types of sustainable funds
- Putting your knowledge of sustainable funds to work
- Morningstar low carbon definition
What Is Sustainable Investing
“Sustainable investing is an approach of using capital as a means of fostering economic and social progress and to combine financial return with social impact.
Aside from supplementing traditional financial analysis on companies with the integration of environmental, social and governance criteria, or the conscious exclusion of certain sectors or sub-sectors from an investment portfolio, sustainable investing is most impactful when sustainability is the core investment conviction.
This approach is the firm belief that only companies that are able to grow their businesses with zero negative impact on the environment and society will outperform.”
Firstly, there are a lot of terms that seem synonymous – or interchangeably used, depending who you talk to – including sustainability, ESG (short for environmental, social, and governance), impact investing, and responsible investing.
There are also some very pervasive myths. Many people believe they will sacrifice return if they invest in line with their beliefs, so they figure they should hold their nose and stick with conventional investments. Not true!
If confusion is the biggest thing holding you back from recognising sustainable investments, read on. We’ll guide you through how we classify sustainable funds and show you how to use Morningstar research to distinguish and evaluate sustainable investments on your own.
What Are The Terms?
Let’s start with the big one: sustainable investing. At Morningstar, we frame sustainable investing as an overarching investment approach that incorporates environmental, social, and corporate governance criteria throughout the investment process.
Environmental factors include company behaviour and policies on issues like climate, pollution, energy efficiency, and renewable energy. The social factor evaluates things like a company’s commitment to inclusion and diversity in the workplace, fair wages, forced labor, supporting the local community, customer privacy, and product safety.
Finally, the governance factor measures things like executive pay, political donations and lobbying, bribery and corruption, and board-level attention to sustainability and climate issues.
Let’s pause here for some myth busting. Raise your hand if you think the crux of sustainable investing involves avoiding “problem” stocks, such as tobacco or gun companies.
This method, called negative (or exclusionary) screening, used to be standard among socially responsible funds, which were an early version of sustainable funds around in the 1980s and 1990s (but you still hear the term today).
Funds still use negative screening today, especially among funds that invest in line with religious values, a problem with using the approach only is that it excludes prominent companies from the investment universe for nonfinancial reasons, which can lead to underperformance.
These days, many sustainable funds take a more integrative approach to building a portfolio. The emphasis is on identifying stocks that have best-in-class practices in addressing ESG issues relevant to that particular company. It tilts the portfolio toward companies that are better at managing ESG issues and therefore less likely to face financial risks such as fines, lawsuits, and reputational damage.
Types of sustainable funds
Before we delve into how we classify sustainable funds, let’s go over what a prospectus is. Every mutual fund and exchange-traded fund is required by the Securities and Exchange Commission to publish a guide that explains (among other things) its investment strategy, who runs the fund, how much it costs, and what its major risks are.
An increasing number of funds state in their prospectus they consider ESG factors as part of their investment process. Beyond stating that ESG factors are considerations, however, these funds rarely use exclusionary screens, impact analysis, or shareholder engagement as a formal part of their process. We call these funds ESG Consideration funds.
Contrastingly, ESG Focus funds, are funds that make sustainability factors a featured component of their processes for both security selection and portfolio construction.
A third group, Impact funds, focuses on broad sustainability themes and on delivering social or environmental impact alongside financial returns. Impact funds are often focused on specific themes, such as low carbon, gender equity, or green bonds (which fund new and existing projects with environmental benefits).
Finally, there are Sustainable Sectorfunds, which focus on the stocks of companies that contribute to, and aim to benefit from, the transition to a green economy in areas like renewables, energy efficiency, environmental services, water, and green real estate.
This article endeavours to show you how the landscape of sustainable funds breaks down into the four types and lists prominent funds in each category.
If after reading the article you have questions, or need assistance, then call MB+M on 03 5821 9177 and talk with one of the experienced Certified Advisors from our Wealth Creation team.
Our commitment at MB+M/OzPlan is to help you achieve the investment outcome you desire and making your life easier…..
This publication has been compiled by OzPlan Financial Services, ABN 35 005 391 202 AFSL 221235 and is current as at time of preparation, April 2020
Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This publication may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication.
Visit Our Insights Page For More Helpful Articles