Market volatility has been the dominant story for many investors in early 2022, but even as we focus on near term events it’s important to continue to track important market trends. Sustainable investing has become a significant theme in how many investors choose to direct some or all of their capital, choosing to emphasize businesses that show they’re in it for the long term. The space has been evolving as it continues to meet its critics and address the challenges that come with growth, with several important developments in 2021.
What Is Sustainability?
The concept of sustainability can easily get bogged down in confusing definitions and minutia. Most simply, sustainability is humanity meeting its current needs without overburdening the natural environment or future generations. Environmental sustainability refers to maintaining the balance of natural systems and that natural resources are consumed at a rate that can be replenished. Social sustainability refers to a minimum standard of basic necessities and that human rights is afforded to all people. As shown below, sustainability includes action by individuals, companies, governments and increasingly investors.
Environmental, social and governance (ESG) issues fit within sustainability, but in its broadest sense ESG is a grading system for firms. ESG criteria are used by investors to gauge companies (and increasingly governments) on their ESG performance relative to their peers. Environmental metrics may include a company’s carbon dioxide emissions, water usage or impact on deforestation. Social metrics may include a company’s employee engagement, diversity and inclusion, and employee health and safety. Governance metrics may include a company’s board composition, executive compensation, and other internal procedures.
Sustainable investing incorporates ESG metrics into the investment process to provide greater transparency and help manage ESG risks and opportunities. As illustrated in Figure 1, sustainable investing is part of a larger effort to provide social and environmental awareness and stewardship.
Growth Of Sustainable Investing
Sustainable investing mutual funds and exchange-traded funds (ETFs) continue to attract record flows from investors [Figure 2]. Determining this universe involves the identification of funds that demonstrate a commitment to ESG considerations in their investment process (disclosed in the principal investment strategies section of their prospectus). As of December 31, 2021, assets grew 52% from the year before to $362 billion.
The universe of sustainable investing mutual funds and ETFs has also continued to grow since the first fund was launched in 1971 [Figure 3]. The growth in available options provides investors with a spectrum of choices, from being able to build a diversified stock and bond portfolio, to selecting a specialized strategy to supplement a traditional diversified portfolio. In 2021, the number of available choices grew 44% to 560.
