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Clients are asking more than ever of their advisors. Routine conversations around having enough to retire, saving for college, or leaving a financial legacy have become more robust as individuals have come to recognize that these matters have both financial and non-financial impacts on their lives. The emergence of “responsible investment” solutions has created an opportunity for clients to approach their portfolios more holistically and in line with their beliefs and values. The historical perception of a trade-off between optimizing returns and reflecting values is a false dichotomy.

Over the past decade, investors have become increasingly accepting and proactive about incorporating socially conscious considerations into their investment processes. Recognizing the importance of this development, the United Nations established the Principles of Responsible Investment (PRI), which assists investment managers, service providers and asset owners in their efforts to incorporate environmental, social and governance factors into their decision-making. Today, the PRI boasts more than 1,700 signatories, with assets in excess of $68 trillion globally.1 According to the Forum for Sustainable and Responsible Investment, more than one out of every five dollars invested by professionals in the United States considers sustainable, responsible, or impact investment factors.2

Responsible investing generally involves the consideration of environmental, social and corporate governance (ESG) factors in investment decisions alongside financial information. Most current approaches fall into one of three broad categories: ethical investing, ESG investing, and impact investing. The differences among these strategies, while subtle, are important.

Ethical investing, sometimes referred to as socially responsible investing (SRI), uses negative screening to exclude companies deemed to be morally or ethically undesirable, such as alcohol, tobacco, gambling and firearms. Critics have argued that this exclusionary screening process can hurt returns by restricting the universe of investable companies. ESG strategies seek to solve this problem by taking an integrated approach that considers a broader range of factors alongside financial factors. Lastly, impact investing endeavors to invest in companies that will generate a measurable social or environmental benefit alongside an acceptable investment return. This latter approach currently is found mostly among private strategies.

The ESG investing approach is the most easily accessible to investors and well positioned to blend social and financial considerations appropriately for investors.

Examples of ESG factors include:3

ESG Strategies

By Brian W. Katz, Robert H. Schundler and Michael J. Nathanson - Read the full article here.