Making Sense of ESG, SRI and Impact Investing INSIGHTS

Investing with Purpose: Making Sense of ESG, SRI and Impact Investing INSIGHTS

Many investors want to bring their portfolios into alignment with their personal values, but don’t know where to start. This Insights outlines the three most common approaches.

CARIN L. PAI, CFA® A growing awareness of environmental which companies are making the Executive Vice President, and social issues, along with the most progress in this area, investors Head of Portfolio Management availability of data on corporate can find a comfortable place on responsibility, is changing the way the spectrum between doing well individuals think about investing. financially and doing good things for Increasingly, investors are bringing their the world. portfolios into alignment with their

MICHAEL FIRESTONE personal values. Three Common Approaches Managing Director, to Responsible Investing Portfolio Manager There are many different approaches to “responsible investing” and they go Responsible investing means different by different names—including ethical, things to different people, and there is sustainable and green investing. But a broad spectrum of approaches. But they all have one thing in common: the most commonly used techniques They pursue financial rewards while are ESG, SRI and Impact Investing. The approach investors take depends NATALIA LAZAR-GALOIU encouraging positive changes in Senior Investment the world. largely on their personal preferences Associate and which part of the spectrum they Doing Well Financially While find most appropriate—depending on Doing Good Socially how heavily they want to lean toward achieving financial goals versus Traditionally, investment decisions have promoting social causes. been aimed at achieving financial goals, using research on economic trends Environmental, Social, and analyzing a company’s balance Governance (ESG) sheet. If investors wanted to also Environmental, social and governance promote positive change in the world, (ESG) is the most common approach, they typically turned to philanthropy, using sophisticated analytical tools donating money to worthy charities and Big Data to assess a company’s associated with causes they supported. efforts at promoting sustainability— The rise of responsible investing is pursuing long-term growth without providing a way for investors to pursue putting the environment or economy both avenues at the same time. With in jeopardy for future generations. more information available about ESG criteria are incorporated into the overarching security-selection process. Building Social Values into an Investment Portfolio management teams, strong corporate cultures and social awareness. Within each industry, we favor companies Social Philanthropy Values with higher ESG scores compared to their peers.

Direct impact can be made Better Business Practices, More dif cult to implement, requires Impact Investing Higher Quality Companies a consultative approach In our view, ESG investing should not require a tradeoff in performance. Screening in or out In fact, a growing body of evidence Our tailored investment approach SRI allows for screening companies in or indicates that incorporating ESG factors out, based on investor preferences into the research process may offer Analysis factored into research long-term performance advantages. ESG factors are integrated Financial ESG Integration The US Department of Labor recently into our investment Goal selection process weighed in on the topic, explaining that ESG factors are proper components of a fiduciary’s responsibility to thoroughly Making the Grade • Governance Factors. How is analyze all investments. As such, ESG investing is based on data a company’s oversight structured, ESG investing does not conflict with provided by rating agencies, which such as board diversity, gender a fiduciary’s responsibility to maximize grade each company on a wide range compensation and avoiding conflicts investment returns. of factors related to environmental, of interest? Companies with management teams social and corporate governance. Answers to these questions enhance that recognize the importance of Some ESG factors, such as executive the investment decision-making ESG in the marketplace often have compensation and human rights, process by providing information that a greater awareness of potential risks have played a pivotal role in security complements traditional financial that could one day become financial analysis for years. Others, such as analysis. disasters, so they can manage them protecting personal information, have more effectively. Also, companies gained significance more recently. All Favoring Firms with Higher ESG Scores that are socially conscientious tend of these factors may have an impact on ESG factors play an important role in to incorporate business practices the company’s financial performance. understanding a company’s exposure that contribute to long-term success, to risk and how that relates to potential Ultimately, each factor seeks to answer such as gender diversity on senior investment returns. ESG analysis simple questions. management teams and meaningful strives to gain an awareness of factors community involvement. • Environmental Factors. How does that might impact a company’s a company manage its impact on the financial performance and identify Socially Responsible Investing (SRI) environment (e.g. waste disposal, players that stand out from the crowd. Socially Responsible Investing (SRI) carbon emissions and other practices places a finer point on personal At Fiduciary Trust, we integrate ESG that affect air and water quality), and values by actively pursuing ethical, factors into our standard research how might that affect its profitability? environmental or social objectives process as well as portfolio construction alongside financial goals. To implement • Social Factors. How does a company and ongoing review. This data is used SRI in a portfolio, investors must manage its relationships with as part of our search for best-in-class have the ability to personalize their employees, suppliers, customers, and companies with forward-thinking the communities where it operates?

2 Investing with Purpose: Making Sense of ESG, SRI and Impact Investing fiduciarytrust.com portfolios by including or excluding a compromise that satisfies an investor’s including private family foundations, certain companies, sectors or social concerns while preserving the charitable trusts, donor advised funds countries, for example, to reflect financial integrity of the portfolio. and other tax-efficient approaches to their personal social values. philanthropy— can help achieve Impact Investing this goal. Positive and Negative Screening In a broad sense, any approach to SRI strategies may incorporate positive responsible investing can have Investing in or negative screens based on a set of a positive impact on society. But pure a Sustainable Future values-based criteria identified by an impact investing is a specific strategy Investing responsibly has come investor. For example, an SRI strategy that aims squarely at making the world a long way in recent years as demand might screen out “sin stocks” like a better place. grows and ESG data becomes more alcohol, tobacco, or gaming, while Impact investing is therefore the most easily accessible. According to recent screening in companies that promote difficult of the three strategies to estimates, almost 85% of S&P 500 positive changes in society. implement, and can carry significant companies now release data about Eliminating a security, industry or investment risk. Investments are often their sustainability efforts on particular country may make sense focused on smaller, private companies a regular basis. for an investor who has an overriding and community groups working to While efforts are underway to develop personal belief that takes precedence solve specific social or environmental a uniform set of ESG reporting over other considerations, such as problems, sometimes by providing criteria which could further simplify diversification or potential returns. working capital to underserved the due diligence process, there are communities or focusing on a theme For example, an investor may have still several limitations, including such as sustainable agriculture, a strong desire to support environmental guidelines from third-party research renewable energy, conservation, efforts. Therefore, it might be reasonable firms that can vary significantly. housing, healthcare or education. to invest a portion of the portfolio in Transparency and data integrity is also an industry such as renewable energy, Another way to implement impact an issue, as self-reporting on many despite a limited number of investment investing is by actively engaging with ESG factors can be spotty. options and higher risk. public companies, through proxy voting Finally, the ability to completely or involvement with management teams, Portfolio Returns May Be Affected eliminate a certain type of investment to effect change in the organizations. Decisions on screening in or from your portfolio, including screening out certain securities Finely Tailored, Carries Higher Risk companies directly and indirectly can be complicated. Depending on Because this strategy is so complex, associated with a specific issue, might the approach, SRI strategies have our approach to impact investing is be limited. And measuring the true the potential to reduce returns by highly tailored and consultative. For impact of your investment choices is shrinking the investing universe or clients who are interested in this difficult at best. increasing risk by over-allocating to approach, our portfolio managers and With these caveats in mind, we certain categories. These decisions estate planning professionals offer encourage investors to embrace should be thoroughly evaluated and guidance on the best approach for responsible investing with guidance discussed before being implemented. your entire financial well-being. from financial professionals who At Fiduciary Trust, portfolio managers Often, our clients find that the best understand its complexities as well help clients understand the potential way to make an impact in the world as your entire financial picture. benefits and risks associated with any is through philanthropy. A broad SRI filters. In many cases, we find array of charitable giving strategies—

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