A new kind of value investing
In the past, socially responsible investing (or SRI) strategies sought to exclude investments in certain types of companies such as weapons manufacturers, tobacco marketers, or alcohol producers. Strategies that consider ESG factors take a more holistic approach than purely exclusionary approaches – many seeking out long-term growth potential among companies working to develop sustainable solutions to complex challenges such as climate change, clean water, and increasing urbanization.
Developing (green) bonds
Consideration of ESG factors is not limited to equity investments. Green bonds – fixed income investments that finance ESG-related endeavors including energy efficiency, renewable energy, and water management – are also attracting new waves of business. "We're seeing a very strong market in terms of green bonds at the moment," says Chris Wigley, Senior Portfolio Manager with the sustainable investing firm Mirova. Wigley reports that there is a particular interest in green bonds among a younger cohort of investors. "Not only do Millennials want to know how their money is being used," he says, "increasingly they want to know what impact their money is making too." According to Wigley, a range of entities are now issuing green bonds – including multilateral development banks, utility companies, and sovereigns. "Poland was the first sovereign to issue a green bond in December 2016, followed by France, who issued the largest-ever green bond in January 2017."
Opportunities for active involvement
Answering to strong sentiment for ESG factors may be difficult for those whose investment focus is concentrated primarily on passive2 strategies such as index funds. Three in four investors say there are companies they don't want to own because they violate their personal principals. Seven in ten go so far as to say that if they owned a company involved in negative environmental or social issues they would sell it. Meeting such dynamic preferences is not possible with most passive investments, which generally own all the companies in a broad market index, rather than a portfolio of securities selected around specific criteria. Actively managed ESG-focused funds, while often available to investors at higher price points than other ESG strategies, may help provide investors with an opportunity to address these concerns.
For more information, read Going Green: ESG Fixed Income Investing for Global Markets.
1 Natixis Global Asset Management, 2017 Global Survey of Individual Investors conducted by CoreData Research, February-March 2017. Survey included 7,100 investors from 22 countries, 750 of whom are US investors.
2 Passive Management: Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio. By contrast, active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index.
Indexes are unmanaged, do not incur fees, and include reinvestment of dividends and interest income, if any. It is not possible to invest in an index.
Unlike typical passive strategies, there are no indexes that an active strategy attempts to track or replicate. Thus, the ability of the strategy to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing.
Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices, therefore the universe of investments may be reduced. This could have a negative impact on performance depending on whether such investments are in or out of favor.
Fixed income securities/Bonds may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.