Tapping the potential of responsible investing by debunking the myths

Investment options are no longer limited, and the most interested clients are millennials and women

Mar 1, 2015 @ 12:01 am

By Amy O'Brien

Once perceived as a niche area of asset management with relatively limited appeal, responsible investment (RI) has evolved into a diverse, globally recognized discipline, encompassing a wide range of strategies that have gained momentum with all types of investors. Assets managed using RI strategies grew 76% between 2012 and 2014, reaching $6.57 trillion, according to the Forum for Sustainable and Responsible Investment (US SIF). In the U.S. alone, they now account for about 16% of all assets under professional management.

The evolution of RI over time reflects both the growing interest in a variety of environmental, social and governance (ESG) issues, as well as the increased availability of funds and other vehicles that include ESG criteria in the investment decision-making process — not just in equities, but across asset classes. These socially responsible investing funds have a dual focus: competitive, long-term investment returns and the opportunity for economic, social and environmental sustainability.


As responsible investing has continued to gain mainstream traction, many long-held beliefs about SRI funds have fallen by the wayside.

One of the hurdles these funds have had to overcome is the perception that investing with ESG factors in mind is mostly about excluding companies with controversial business products or practices from investment portfolios.

Some approaches continue to focus on the exclusion of specific companies, industries or sectors. But the emphasis is increasingly on incorporating ESG criteria during company research and portfolio construction. This helps identify companies that are industry leaders by measuring their performance with regard to their impact on the environment and society, as well as to how they are governed. The benefit of this positive approach is that it results in a broad and varied list of eligible companies, providing ample opportunities for investors to build competitive portfolios.

Another myth is that for the average investor, investment opportunities are limited primarily to large-cap equities. At one time, this may have been true, but today investors have access to a wide range of investment choices that employ ESG criteria, including publicly traded fixed-income securities supporting projects in such areas as renewable energy, natural resources, community and economic development, and affordable housing. For example, an investor could buy a municipal bond that funds a clean water project or a corporate bond that finances the building of a solar power plant.


With myths giving way to new realities, investors have become more comfortable allocating the core of their portfolios to SRI funds. A 2014 survey of TIAA-CREF retirement plan participants found that 64% of those polled were “interested” or “very interested” in investing — or investing more — in SRI fund options.

Additionally, interest in SRI funds was strongest among the demographic groups that advisers most want to reach: Millennials and women. Some 76% of respondents under the age of 35 indicated an interest in SRI funds, as did 70% of women (versus 55% of men). However, a majority (61%) of those not currently invested in SRI funds said they were unfamiliar with the fund options available, and more than three-quarters (77%) said their adviser had never mentioned SRI funds.

This represents a clear opportunity for advisers. Offering SRI products and strategies can be a key differentiator that demonstrates your awareness and appreciation of your clients' interests and allows you to convert that interest into action, building your business and deepening client relationships in the process.

Amy O'Brien is managing director and head of TIAA-CREF's responsible investment team.


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