Sustainable Investing – Growing Green

By Mark Rylance, CFP®, CFT™

Over the last several years, we have seen increased client interest in investing in companies that have a more proactive mission towards protecting the environment, while screening out those that are known abusers (i.e. oil, gas, pollutants, etc.).  There has also been an increased focus on eliminating investments in companies that negatively affect our society (i.e. cigarettes, guns, etc.).  Until recently, investing like this was impossible unless you invested in all individual stocks, where you could handpick the stocks that you did and did not want. However, this could leave you exposed to an undiversified investment portfolio. In addition, there was also a worry that by eliminating entire industries, your investment performance might be negatively impacted.

Fortunately, these limitations are no longer an obstacle.  A handful of mutual companies have started to provide a selection of what are known as ESG investment options, including Dimensional Funds, a fund company that we use.  ESG stands for Environmental Social Governance.

In addressing environmental concerns and sustainability of the planet, the question remains, how can a manager reduce a portfolio’s environmental footprint while maintaining sound investment principles and performance objectives?  It is clear that a holistic scoring system would need to be used rather than a completely binary (“in” or “out”) screening process.  This way, investors could preserve diversification while still recognizing the companies that have a positive environmental score.  It is simply impossible to eliminate every company that uses combustion engines to transport their products, or to screen out every company that uses chemical products.  However, what you can do is screen for companies that are intentional about reducing their carbon footprint.  In addition to screening for reduced greenhouse gas emissions, companies are also screened over concerns about land use and biodiversity, toxic spills and releases, operational waste, and water management, among other issues.

Socially responsible funds (the “S” in ESG) focus on reducing or eliminating the investment in companies that have poor track records on human rights issues, fair labor practices, tobacco, weapons manufacturing, etc.  A similar holistic screening process is used to screen these companies.

The final element in ESG investing is governance.  Investment companies can now help shape corporate governance through shareholder advocacy.  Mutual fund companies can use their investment influence to engage companies and help shape their policies through proxy voting, corporate resolutions, and ongoing dialogue with companies to promote social, environmental, and governance changes.

The key takeaway for investors is that investing well and incorporating values around sustainability and social impact investing need not be mutually exclusive.  We now can create and monitor a globally diversified and low cost investment approach that helps investors pursue their sustainability and social impact goals without compromising on sound investment principles or accepting lower expected returns.


Source: Dimensional Fund Advisors LP.