The demand for sustainability investments is growing. Companies that offer measurable social and environmental impacts that address issues like world hunger, climate risk, poverty and access to health care, seem like a good investment for those socially-minded. Finding companies that also provide a good financial return at the same time is not so easy.
Sustainability investing is different from the decades-old trend called “social investing.” Generally, social investments are those that bet on solar power, clean water, or the avoidance of “sin stocks” such as tobacco, guns or liquor companies. Most of these areas were not viable investments without a great deal of government help.
The idea of sustainability goes far beyond that concept. In this modern-day make-over, the idea is to use your money to solve some of these enormous global environmental, social and governance (ESG) issues and also make a profit over the long-term. Of all social groups measured, it is the Millennials who profess the most interest (80%) in social-impact investing. An increasing number of younger investors (28%) are putting their money where their mouth is. They want to select investments that reflect their own values and personal priorities.
After all, when you think about it, they are inheriting a world that we, the Baby Boomers, have totally messed up. Just look around you. Our fossil fuels are burning the planet alive. The air in China, or in Mexico City among many other locales, is so bad citizens routinely where masks. Millions are starving. Water is fast disappearing from much of the earth.
I know, I know, I can already see yours eyes glaze over. By this time, most oldsters of my generation have tuned out these warnings. Most Boomers are immune to socially-responsible rants. They don’t want to hear it, have no solution for it, and don’t want to face the guilt and shame of their actions.
But realize that there are one and maybe two generations of our population that want (and need) to do something about it. Given that the millennials and the Gen Z populations are the ones who will inherit this earth, from their point of view, they need to tackle these problems, because for them it is a life or death proposition.
A number of studies predict that Millennials are poised to receive more than $30 trillion of inheritable wealth. The money is already starting to flow in as my generation kicks the bucket. These young investors are fully-versed on the issues they face. For example, by 2050, an estimated 2 billion more people will crowd into the earth’s cities and towns. Global demand for food, water and energy will drive the need for innovative improvements in infrastructure simply to handle the demand for additional resources.
The question is: can you also make money by fixing these issues? The jury is still out on whether the two can be accomplished together, but initial results are encouraging.
Sustainability investing is experiencing a compound annual growth rate of over 100%. Granted, it is still only a niche market, representing only 18% or so of the wealth and asset management industry. A recent study by mega-broker Morgan Stanley, which evaluated over 10,000 funds and managed accounts, show that sustainability investing has usually met and often exceeded the investment performance of comparable traditional investments.
Environmental, social and governance (ESG) investment performance achieved an annualized return of 10.2% versus the bench market S&P 500 equity Index return of 9.7%.
Since all of the challenges facing the world are also long-term in nature, it makes sense that global pensions funds, especially in Europe and Japan, would be interested in this area. Given their own long-term investment views, global pension managers have invested about $23 trillion or 26% of managed assets in these areas.
To date, there are 50 ETFs(exchange traded funds), and about 250 open-end mutual funds that offer access to the ESG/sustainability area. ESG funds (as they are called) have the least assets among the eleven smart-beta categories according to a Bloomberg survey. But before you start buying, investors should beware that most of these investments are extremely illiquid, experience enormous amounts of price volatility, and should be thought of as very speculative, long, long term investments at best. They are not for widows, orphans or 98% of retail investors.