If you follow financial news in the popular media, you likely have heard the term “sustainable investing”. The investment research company, Morningstar, defines sustainable investing as “a long term investment approach that incorporates environmental, social and governance factors in the investment process.” They have reported that new investments in sustainable funds more than doubled in 2020 compared to 2019, reaching a record-high $51 billion. Starks Financial has always prioritized helping clients meet their financial goals in a manner that aligns with their values and core beliefs. Increasingly, lots of clients want their investments to contribute to the greater good of society, in addition to getting them to their financial goals. Older research concluded that following sustainable investing precepts meant sacrificing market performance, but newer research shows that is no longer the case. In this blog, I’ll consider a couple of challenges that sustainable investing faces today, as well as ways that it can move forward.
It is great to know that customer voices are being heard and that we have the power to influence portfolio managers to push the makeup of their funds towards more sustainable companies. However, because of this demand from consumers, companies may want to just hop on the train of this popular trend, without implementing any real change. This is a practice called Greenwashing, in which companies are just “selling an idea” to present a green image without changing the substance of their practices. Put another way, “greenwashing has effectively co-opted the concepts of sustainability and eco-friendliness into modern business practices, with mixed results”.
The philosopher Slavoj Zizek illustrates “selling an idea” with the example of buying coffee at Starbucks. When you go in and buy your coffee, you see signs stating that Starbucks promises to distribute trees to farmers in Mexico, Guatemala, and El Salvador, and to provide safe spaces for local and migrant workers’ children. So, “what Starbucks enables you, is to be a consumerist, without any bad conscience, because the price for the countermeasure, for fighting consumerism, is already included into the price of a commodity”. Zizek argues this “quick green fix” should not absolve Starbucks of the responsibility to run its business in a sustainable way.
Another example took place at the UN Climate Conference in 2009. BMW wanted to appeal to consumer demand, so they brought hydrogen-powered cars to present a green image. However, immediately after the conference, BMW stopped development of these cars with no intentions of further production anytime soon.
If you go to any grocery store these days, you will see many companies strategically packaging their products to align with this environmentally friendly idea. Cleaning product companies, make-up brands, the list goes on.
I think Zizek would agree that, though we all just want the immediate gratification of knowing we are contributing towards the betterment of society, sometimes it takes a bit more investigation to be sure that our choices line up with that goal.
Criteria for Sustainable Investing
Investors must choose from a rapidly multiplying array of options claiming to be sustainable and responsible. The criteria that mutual fund companies use to pick companies that qualify, and the depth of their analysis of those companies, can vary greatly. Everyone has a different definition for what qualifies as an ethical investment. For example, one company failed to qualify for an SRI fund because it did not have any women on its board, so the CEO brought in his wife to be a board member. This is not the change that sustainable investors are looking for. The Sustainability Accounting Standards Board (SASB) creates uniform methods of measuring companies that helps mutual fund managers choose which companies to invest in, in hopes of preventing instances like this.
Where to go from here
We know that the voices of sustainable investors are being heard and our demands are beginning to change the investment landscape. But, to guarantee real change, it will be necessary to continue the work in standardizing the processes for screening companies for sustainable practices and measuring their impact on the environment. This would ensure that they are being fully transparent – not just promoting and overstating their positive impacts, while hoping investors don’t find out about the negatives.
Another idea is taking the time personally to investigate and research the funds we are investing in. With all of the misleading claims circulating, it is worthwhile to do some digging and know what companies make up the mutual fund you are investing in. One helpful tool is asyousow.org. This site aims to promote corporate accountability through shareholder action. They created five online tools to screen mutual funds: fossil-free funds, weapon-free funds, deforestation-free funds, tobacco-free funds and gender equality funds. Morningstar’s Sustainalytics is another entity that works to establish sustainability ratings and standards. Their data helps investors discern funds that are truly focusing on sustainable investing from those incorporating some environmental, social, and governance factors, but in an insignificant way.
As individuals, we have the power to demand these larger systemic changes. This will likely be a gradual process, with many challenges. Starks Financial is committed to staying at the forefront of sustainable investing. We want to utilize the ever-improving tools on behalf of our clients during our fund selection process, with the end goal of assembling portfolios of sustainable funds that allow our clients to meet their financial goals while staying true to principals that are best for our society and our planet.
Incorporating sustainable investing criteria into the investment selection process may result in investment performance deviating from other investment strategies or broad market benchmarks.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.