Article Written By
Mark C. McKaig, Partner, Centurion Wealth Management
September 2017
Trends in Sustainable Investing
In recent years, interest in issues such as climate change, water conservation, workplace diversity and human rights has intensified, moving socially responsible investing into the mainstream. Of course socially responsible investing has been around for decades if not longer. Historically, investors seeking to align their investments with their social and environmental values would “screen out” those negative corporate practices that they would rather not profit from. These negative screens typically excluded the oil industry, the arms industry, logging and mining companies as well as alcohol and tobacco producers. Negative, or avoidance screening, tended to be cumbersome and expensive. At the same time, negative screening suffered from the widely held belief that ethically directed investments were by their very nature likely to reduce financial return. This assumption was perpetuated by Milton Freedman, who in the 1960s and 1970s argued that social responsibility adversely affects a company’s financial performance and that regulation and interference will always damage the bottom line. This led many socially and environmentally conscious investors to assume that they had to make a choice between cost and performance and investing in an ethically responsible manner.
Things began to change in the new millennium when the investment market began to pick up on the growing need for products geared towards what was becoming known as the “Responsible Investor.” These investors (often institutions like pension funds and foundations) began to look beyond negative screening towards the full integration of environmental, social and governance factors into their investment process. Thanks to new technology, these three factors, now widely known as ESG, became more measurable and reportable.
Where Friedman provided the academic support for the argument that the integration of ESG factors into portfolio construction would reduce financial performance, more recent reports suggest that embracing environmental, social and governance best practices is good business. Companies that implement sustainable business practices can create efficiencies that increase shareholder value and mitigate risk. For example, initiatives to reduce and reuse waste, improve energy efficiency or conserve natural resources can produce savings that flow to a company’s bottom line. Likewise, companies with strong corporate governance may avoid costly workforce problems or regulatory sanctions.
Centurion Wealth Management’s socially responsible strategies seek to capitalize on the broad array of ESG investment choices while seeking to achieve both a positive impact on society and favorable investment results. Our integration of ESG factors and data aligns our client’s investments with their values, without losing focus on performance.
