Broker Check


| July 12, 2018
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Investors today, more than ever before, have become increasingly interested in aligning their investment strategies with their own personal beliefs and values.  This pervasive trend in the investment world is the fundamental reason why socially responsible, or ESG (Environmental, Social, Governance), investing has become one of the most popular and fastest growing investment trends in the past decade.  But just what do we mean by socially responsible or ESG Investing?

Due to its explosive growth in popularity the term ESG investing has become somewhat of a buzzword for any type of investment strategy that uses some form of “sustainability” factors, or other ethical considerations, in the investment decision-making process.  Very simply stated: ESG is a set of pre-defined criteria (that is related to environmental, social, and/or governance factors) that both investors and businesses utilize to analyze potential financial investments.  To put it another way, by utilizing ESG criteria as their inputs, investors are able to engage in socially responsible investing (SRI) and businesses have the ability to engage in activities that bolster corporate social responsibility (CSR).  For the sake of clarity, we will use the term “SRI/ESG investing” as an all-encompassing phrase for both SRI and ESG.

The History of Socially Responsible Investing

ESG investing traces its roots all the way back to biblical times, when Jewish law specified practices about ethical investing. The Qur’an and Islamic teachings also included guidelines for Halal or Shariah-compliant investing, which focused on moral values and required that investors avoid certain types of investments.

The modern history of ESG investing dates back to the 1960s. A series of social and political concerns regarding the Vietnam War, civil rights, environment pollution and women equality served to escalate awareness and action regarding issues of social responsibility and accountability.

In the 1980s, the practice of ESG investing took center stage as universities, churches, and municipalities focused on investment strategies that excluded exposure to South Africa, as it was in the midst on dismantling the racist system of apartheid. Then, with environmental disasters such as Chernobyl and Exxon Valdez, the environment and energy became hot-button issues for investors across the globe.

In recent years, school shootings, human rights, gender identity awareness, governance-based corporate scandals, and safe and healthy working conditions in factories that produce goods for U.S. consumption have become rallying points for investors with dual objectives for their investment capital. Most recently, the climate crisis has awakened investors to opportunities inherent in directing investment capital towards clean tech and clean energy.


Busting the Myths

Myth: Socially responsible investors sacrifice performance in exchange for upholding their personal values.

Fact:  Substantial research has been performed to better understand any potential trade-offs between long-run performance and the utilization of positive/negative socially responsible screens.  This research has included the traditional exclusionary approach.  Ultimately, little evidence has been found that would support the argument that this style of investing hurts performance.  In fact, most studies show either a neutral or positive effect.  It is possible that sustainable or socially responsible investing can lead to outperformance, due to the consideration of ESG issues that steer investment analysts to focus on factors and issues that may not receive equal attention under the lens of traditional financial analysis.

Researchers at the University of Oxford analyzed 200 studies, reports, and articles on sustainability.  Based on their research, they found that on a firm level:

  • 90% of the study shows that sound sustainability standard lowers the cost of capital in companies.
  • 88% of the research shows that solid ESG practices result in better operational performance.
  • 80% of the studies demonstrate that stock price performance is positively influenced by good sustainability practices.

Lastly, a Morgan Stanley study of US domiciled mutual funds and Separately Managed Accounts (SMAs) concluded that sustainable investments usually met and often exceeded the performance of comparable traditional investments, both on an absolute and also risk-adjusted basis.

Myth: Investors that prioritize sustainable strategies have an extremely limited investment universe.

It is estimated that in 2016, United States asset managers utilized ESG criteria in the investment of $8.7TN, a notable 33% increase from 2014.  The increased use of SRI/ESG screens within the financial industry is a clear reflection of the rising popularity and wide spread acceptance of this “new” form of investing.  The trend is evident, an ever-growing number of investors want to invest their dollars in a way that more closely represents their personal values.  By proactively choosing to invest in certain companies, and altogether avoiding other companies, the flow of funds can act as a powerful way to persuade and influence the behavior of corporate management.  In fact, we have already witnessed a growing number of CEOs realize that it is in their companies’ best interest to adopt socially responsible practices.

If someone were interested in SRI/ESG investing, the choices available to them today far outweigh the offerings even just five years ago.  Before, in the 1980’s and 1990’s, investors only had a handful of SRI/ESG funds to choose from.  Today, investors can pick from thousands of SRI/ESG mutual funds and exchange-traded funds (ETFs).  Furthermore, nearly all equity asset classes are represented, with offerings in all U.S. capitalization sizes.  SRI/ESG investments are also available to those whom are interested in investing internationally, both in developed economies and emerging markets.  It is important to note that the offerings within fixed income securities are not quite as extensive as they are for equities.  However, many funds are starting to offer a broader selection of socially responsible bond funds.

Myth: Sustainable investing is a niche activity that is not appropriate for serious investors.

Fact:  The sustainable investment market in Europe is worth more than $13TN, while in the United States these assets amount to $8.7TN and growing as of 2016.  Fund flows and demographic shifts demonstrate that sustainable investing has the potential to grow to make up a significant part of the market.  Take for instance women, millennials, and generation X investors.  They have all expressed a strong interest in the SRI/ESG approach to investing.  Women and millennials are becoming more influential in the investment decision making process.  In the US alone, women presently have decision-making control over an estimated 40% of the nation’s investable assets.  Furthermore, approximately $30TN will be passed from baby boomers to younger generations over the next 50 years.  Sustainable investing could potentially be a new way to reach new demographics of investors, while at the same time addressing the shift in investor preferences.

Here at Tompkins Financial Advisors we firmly believe in the merits of Socially Responsible Investing.  Our Investment Committee has managed the TFA Socially Responsible Investment (SRI) portfolio since 2008.  By virtue of this portfolio, we have helped our clients align their financial goals with their personal values.  If you are interested in learning more about the TFA SRI portfolio please reach out to a TFA advisor in your area.

Explaining the Jargon

Navigating the socially responsible investing landscape presents investors with a dizzying amount of jargon. As sustainable investing has evolved and gained prominence in the investment industry, so has the breadth of associated terminology. The following glossary identifies the more often used terms in the sustainable investment sector.

Clean Energy: Energy from non-polluting sources, including solar, wind and water.

Clean Tech: An investment theme, rather than an industrial sector, that may include investments in agriculture, energy, and manufacturing. Clean Tech represents a range of products and services that either reduce or eliminate ecological impact, or require lower resource inputs.

ESG Investments: The inclusion of environmental, social, and governance factors into financial analysis to evaluate risks and opportunities.

Ethical Investing: An investment philosophy guided by moral values, ethical codes, or religious beliefs, generally associated with negative screening.

Impact Investing: Targeting specific social or environmental outcomes alongside financial returns.

Negative Screens: Removing specific companies or industries not aligned with investors’ values or mission. The most popular negative screens include tobacco, alcohol, and gambling.

Positive Screens: A strategy of identifying investible companies that match pre-determined criteria.

Shareholder Advocacy: Using shareholder power to directly influence corporate behavior or decision-making. This includes communicating with company management on environmental, social, governance and transparency issues, filing shareholder proposals and proxy voting.

Socially Responsible Investment (SRI): Socially Responsible Investment is the process of integrating societal concerns, personal values or an institutional mission into investment decision-making. It is an investment process that considers the social and environmental consequences of investments within financial analysis.

Sustainable Investing: The explicit incorporation of ESG objectives into investment products and strategies.

Thematic Investment: Selecting and investing in assets on the basis of investment themes such as climate change.

Sources Cited

Investments are not insured by the FDIC, not deposits of, obligations of, or guaranteed by the bank or its affiliates, and are subject to investment risk including possible loss of principal. I recommend consistency in this disclosure across all print marketing pieces.

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