According to the latest report by the US Forum for Sustainable and Responsible Investment (US SIF), investors now consider environmental, social, and governance (ESG) factors for $12 trillion of professionally managed assets. That’s a 38% increase from 2016. It’s also out of a total universe of $46.6 trillion of professionally managed assets in the US. That means that almost a quarter of assets could now be considered “sustainably” or “responsibly” invested.
But the lack of an industry standard muddies the water. Right now, there are several standards and the same company can do well in one but poorly in another. You can avoid disappointment by pushing your investment professionals to tell you more about how they define sustainable investing.
The confusion begins with the terminology. Swiss bank UBS surveyed more than 5,000 of its wealthiest clients and found little understanding of the differences between the three main approaches to sustainable and socially responsible investing: exclusion, integration, and impact investing. 1
Exclusion means not investing in companies that are involved in activities that don’t support certain values, most often weapons and tobacco companies. Integration means actively incorporating environmental, social, or governance factors into investment choices. Impact investing intends to generate measurable ESG impact as well as a financial return.
Socially responsible investing preceeded sustainable investing and I would not consider it/exclusion to be enough for sustainable investing, because your values might be pro or con gay rights, pro or con military, pro or con alcohol. Sustainable investing at a minimum looks at the best performing companies (from a sustainability perspective) in each industry sector with the expectation that they will actually out-perform their less-enlightened competitors because they have a better handle on emerging risks and opportunities. Impact investing is the next step up, for example, investing in projects that will make the world better (like fighting climate change or building public transportation.)