"Why can't my investment portfolio reflect my personal values?" We're increasingly hearing that question from clients who want to pursue sustainable investment strategies that align their personal values with their investments. According to Morningstar, assets in socially screened portfolios now exceed $6 trillion, up from $639 billion in 1995. Demand for sustainable investments seems particularly important to the millennials that represent the next generation of investors for advisors. A Morgan Stanley survey of individual investors highlights this coming demand, as 71% of respondents and 84% of millennial investors expressed interest in sustainable investing.
Some investors pursue alignment with their personal values by excluding individual companies or economic sectors, others through inclusionary and exclusionary criteria at an individual company level. Sustainable investing comes in many forms, covering distinct but not always clearly defined categories including sustainable investing, socially responsible investing (SRI), impact investing and environmental, social and governance investing (ESG).
We expect sustainable investing to enter the mainstream in coming years, making tomorrow's approaches very different than the approaches that thrived in recent years.
Here are five trends to watch.
Trend 1: "I Want My SRI" Clients will want their personal preferences reflected in their portfolios.
The band Dire Straits sang "I want my MTV," in their hit 1980s song "Money for Nothing." Tomorrow's investors may sing a different tune, favoring investments with a social impact while avoiding those considered to have a negative impact.
However, sustainable investing means different things to different people. Some investors prioritize environmental considerations, others prioritize social issues such as child labor or governance issues such as more diversity on corporate boards. Environmentally focused investors may not have uniform environmental priorities.
Some clients favor fossil-fuel-free strategies that divest completely from oil, gas and coal companies as well as energy services companies that support the oil, gas and coal industries; others favor low carbon strategies that avoid companies with the heaviest carbon footprint. There are some similarities between the approaches, but also some profound differences!
We expect investors to demand options more explicitly aligned with their personal preferences – creating much more in the way of personal choice. In much the same way that cable television now provides entertainment choices tailored to a variety of diverse interests, the sustainable investment field will see an expansion of options in mutual funds, ETFs, indexes, and customized separately managed accounts.
Trend 2: "Show Me the Money" The flow of money into the industry will change the established order.
The 1996 movie Jerry Maguire originated this well-known quote, used by many in subsequent years. Money flows into sustainable investing strategies will change the nature of the industry. Pioneering sustainable investment firms such as Calvert, Parnassus, and PaxWorld were friendly competitors who shared foundational beliefs and often collaborated on issues of mutual interest. Most major investment firms are offering, or are considering offering, sustainable investment strategies. BlackRock created a dedicated division focused on sustainable investing, Goldman Sachs acquired an ESG-focused firm, and Merrill Lynch and UBS are among the retail broker-dealers that have launched or plan on launching responsible investment platforms. New entrants will undoubtedly change the competitive environment, with both positive and negative implications for clients.
Trend 3: "Crazy Eddie's Prices Are Insane" Price competition is coming!
I grew up in New York, and remember watching commercials with my grandfather and uncle for the "Crazy Eddie" chain of retail electronics stores. Expenses can be silent killers, eroding mutual fund returns for often unsuspecting investors. Investing in actively managed funds can be an expensive proposition, as expense ratios for actively managed sustainable funds average approximately 1.2%, according to an Advisor Partners study.
Crazy Eddie's legacy is alive in the investment world, as ETFs and robo-advisors are creating what appears to be a "race to the bottom" in fees for traditional investment products. With the entry of new competition, I expect to see fee-compression pressures in coming years for sustainable investment strategies.
Trend 4: "Markets Are Efficient" Sustainable investment strategies face the same performance challenges as traditional investment strategies.
