In January 2010, US SIF reviewed the performance of 160 member funds on its mutual funds performance chart, which is tracked by Bloomberg. The foundation found that 65% of these funds outperformed their benchmarks in 2009, most by significant margins. Large-cap funds that use ESG criteria did especially well-72.6% of them outperformed the S&P 500. A majority of these large-cap funds also beat the S&P 500 over three- and ten-year periods, according to US SIF. This data often changes advisors' and clients' perceptions that sustainable investing means sacrificing performance (though past performance is no guarantee of future results).
Fifteen years of academic research indicate that, over time, strategies employing ESG criteria perform well against those that do not. The 2011 winner of the UC Berkeley Moskowitz Prize, which recognizes research in SRI, was a paper called Does Corporate Social Responsibility Affect The Cost Of Capital? In it, the authors found that firms with better corporate responsibility scores enjoy cheaper equity financing. Investing in responsible employee relations, environmental policies and product strategies, the authors suggest, can help companies substantially reduce their cost of equity.
In another recent study, two Harvard Business School professors analyzed 180 companies and found that "high sustainability companies dramatically outperformed their counterparts over the long term, both in terms of stock market and accounting performance." The authors of the study, The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, suggest that strong environmental and social performance policies create a strong culture and promote a company's values and mission.
Because sustainable investment portfolios are focusing on companies with increasingly diverse ESG criteria, they have also started investing in companies from sectors of the economy that were in the past excluded. By expanding their universe, portfolio managers now own more companies that pay dividends and can support a total return approach to portfolio allocation.
What's The Marketing Strategy?
The first time I met the landlord of my office building, he was interested in my focus on social and environmental investing. He's a building inspector and an architect who is active on his town planning board. He was interested in local businesses and residential infrastructure that could reduce energy and resource consumption. Companies that produce goods and services to this end were of interest to him personally and as an investor.
Sometimes just talking about yourself is the best marketing. But this encounter also shows how sustainable investing might present a marketing opportunity with your clients. It could be that many of them are interested in some kind of ESG issue. It could be energy consumption, pollution reduction, gender diversity in the workplace or child labor abuses in overseas factories.
My personal experience bears this out: When I first decided to focus on sustainable investing in my practice, I was surprised to find that 80% of my clients were interested in learning more about it. Now, more than 90% of my clients have between 15% and 50% of their portfolios allocated to sustainable investment funds. This happened because I chose to take my practice in this direction. As an advisor, you need to determine whether this investment strategy is right for you and the clients you serve. Some clients will want it to be a larger part of their portfolio and others may not want to participate at all. Those who are interested will find that the sustainable investment universe covers many mutual fund categories, private equity, ETFs and community investing options (though they are also subject to the same risks these categories are).
Every day, stories appear that you can use to talk to clients about sustainable investing. For example, after Tropical Storm Irene hit late last summer, cities nearby had floodwater deposits backing up into their drinking water because of aging infrastructure, creating a terrible odor. People were understandably upset and eager to hear about funds that invest in water infrastructure and technology for filtration and wastewater management.
Several major corporations that have operations in my community now work closely with sustainable investment portfolio managers and other shareholder groups to reduce their environmental footprint and institute efficiency policies beneficial for shareholders and consumers. When clients hear about what's happening with companies that have operations in their own backyards, sustainable investing becomes more personal.
The proposed Northeast Electric Vehicle Network is another story my clients are excited about. Transportation, energy and environment officials from ten northeast U.S. states and the District of Columbia are joining forces to reduce pollution and reliance on oil. The network is planning for enough electric vehicle charging stations to service 200,000 electric vehicles, according to SustainableBusiness.com. Public policy initiatives like these offer valuable marketing opportunities. Often when I speak to my clients about becoming shareholders in the companies that will benefit from these public policy initiatives, they want to know more about the sustainability process.