What Is Sustainable Investing and Why Should You Care?

TL;DR

Sustainable investing aligns your portfolio with environmental, social, and governance (ESG) criteria but often results in lower expected returns, reduced diversification, and higher fees. As the ESG investing industry grows, investors need to balance their values against these trade-offs and ensure that their selected investments genuinely reflect their beliefs.

Transcript

• Individuals and large institutions alike are allocating more of their dollars to investment strategies that meet some level of environmental, social and governance criteria. This is commonly referred to as responsible, sustainable or green investing. I'll use sustainable to describe it in this video. According to the 2018 global sustainable inves... Read More

Key Insights

• 🙈 Sustainable investing has seen significant growth, with a large percentage of assets under management being allocated to sustainable strategies.
• 😘 Companies with higher ESG scores tend to deliver lower average returns, suggesting a trade-off for sustainable investors.
• 🖐️ Sustainability preferences and dispersion play a significant role in determining the size of the ESG investing industry and the expected returns of sustainable portfolios.
• 😘 Sustainable investing can come with lower expected returns, reduced diversification, and higher fees.
• 🥺 ESG ratings differ across rating agencies, leading to inconsistencies in defining and measuring sustainability.
• 🫵 Creating a sustainable portfolio requires careful consideration of trade-offs and ensuring that the selected products truly align with one's views and values.

Questions & Answers

Q: What are the two common types of sustainable investment strategies?

The two common types are negative screening, which excludes certain sectors or companies, and ESG integration, which re-weights companies based on their ESG scores.

Q: Do companies with higher ESG scores have higher or lower average returns?

Studies have found that companies with higher ESG scores tend to have lower average returns compared to companies with lower scores.

Q: Why do sustainable portfolios have lower expected returns?

Sustainable portfolios have lower expected returns because investors with ESG preferences are willing to accept lower returns to avoid investing in certain types of firms, driving down the expected returns of sustainable companies.

Q: How do ESG preferences and dispersion impact the ESG investing industry?

If there is a dispersion in ESG preferences, it leads to the growth of the ESG investing industry, and as the dispersion increases, expected returns for sustainable portfolios decrease.

Summary & Key Takeaways

• More and more individuals and institutions are investing in sustainable strategies, with over 25% of US assets under management and 2.1 trillion CAD in Canada.

• The two common sustainable investment strategies are negative screening (excluding certain sectors) and ESG integration (re-weighting companies based on ESG scores).

• Studies show that companies with higher ESG scores tend to have lower average returns, suggesting a trade-off for sustainable investors.