Investment Strategies

Planting the sustainable-investing seed

This is no fad but an essential part of business performance and competitiveness

Jun 10, 2012 @ 12:01 am

By William Crager

This is no fad but an essential part of business performance and competitiveness

There has been a recent uptick in interest in investments that are green and sustainable. Unfortunately, the investment world’s attention to this market has been fickle, driven mostly by political sentiment, gas prices and the news of the day.

Sustainability is no fad. In fact, it has become a big part of business performance and competitiveness.

The need for operational efficiency has created dynamic innovation in sustainable practices designed to lower costs and protect future supply and distribution chains.

Leading companies ignore social and environmental issues at their own risk, and the same can be said for financial advisers.

The market is significant. According to a 2010 report from The Forum for Sustainable and Responsible Investments, $3.1 trillion was invested in “sustainable and responsible” assets in the United States.

In describing the opportunity, we favor the term “sustainable investing” because it emphasizes the societal benefit of these investments yet puts the focus where it belongs: on building a portfolio for lasting value.

Solid returns

These investments can and should be made with portfolio return in mind. The MSCI/KLD Social Index, one of the first to benchmark socially conscious investing, performed favorably against the S&P 500 (8.92% versus 8.59%) over the 20-year period ended March 31.

Opportunities for alpha generation are readily found, as well. One of the top sustainable performers is the Generation IM Global Equity Fund, which, as of March 30, had outperformed the Morgan Stanley Capital International All Country World Index by 515 basis points since its inception.

Many advisers, particularly younger ones, have taken heed.

In a study of 1,000 advisers from Hope Global Consulting LLC, nearly three-quarters of respondents expressed interest in sustainable investing. And 63% view it as an opportunity to “get new clients and/or additional assets from existing clients.”

Yet on a weighted basis, advisers think that sustainable investing warrants just a 2.5% allocation in client portfolios. We think that these investments should carry a much more meaningful weighting.

In a survey of 1,264 investors by Allianz Global Investors a few years back, 78% said that environmental technology could be the next great American industry. Yet 85% of investors also said their adviser had yet to recommend an environment-related opportunity.

Advisers who are pathfinders in the market for sustainable investing have a unique opportunity to win the loyalty of such investors.

Here is how to get started:

Look forward. Sustainable investing isn’t just for “tree huggers.” It is about aligning clients’ portfolios with powerful, inexorable social and investing trends while also seeking performance. These are the companies of tomorrow. Need proof? Ask your kids where they want to work.

Information abounds. For a top-down perspective, read “Creating Shared Value” (Harvard Business School Publishing, 2011) by Harvard Business School’s Michael E. Porter. And Bloomberg.com’s sustainability section offers deep, timely information, with enlightening company scores available via its paid service. We also offer the Envestnet Sustainability Platform on our website.

Leave politics to politicians. Generation IM was co-founded by none other than former Vice President Al Gore. The success of the fund well illustrates that the sustainable-investing case is about more than politics. Ignore the partisan noise and focus on the investment case.

Be proactive with clients. The findings of the Hope and Allianz research are in agreement: Investors are interested but think that advisers aren’t offering these opportunities.

Focus on management, not sentiment. Not every client wants to create social or environmental benefit with the portfolio, but what client doesn’t want performance? Sustainable investments offer considerable long-term opportunity.

Stay focused on the long term. Like any investment, sustainable investments will sometimes underperform. In this sector, where current events, news coverage and political change can stir investor anxiety, it is critical to keep clients focused on the long-term opportunity.

The bottom line? Social impact and financial gain aren’t mutually exclusive and are coming together powerfully as companies large and small innovate to do business in a more sustainable way.

William Crager is president of Envestnet Inc., a provider of wealth management solutions.

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