SUSTAINABLE INVESTING: DOING WELL AND DOING GOOD

  • March 14, 2018
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By Tim Kaijala

The Traditional Investment Decision-Making Process Has Evolved. Now it’s More About Inclusion than Exclusion.
As experienced financial planners and investment managers, O’Brien advisors strive to preserve and grow our clients’ wealth. We also believe in nurturing the kind of financial wellbeing that promotes a more fulfilling life as a whole. Lately, many clients have been embracing this mission in a new way: by asking their investments to do more than generate solid returns.

O’Brien clients still want to create financial legacies for their children and grandchildren. However, they also want to invest in ways that effect positive change and build a better world for future generations. That’s where sustainable investing comes in and why we have created our sustainable portfolio.

What is Sustainable Investing?
Modern socially responsible investing first emerged in the 1960s. Initially, the practice meant investors excluded certain industries or companies from their portfolios based on business activities. No tobacco stocks, for example. Or, no bonds issued by chemical companies.

As sustainable investing became more popular, the investment decision-making process evolved. Now, it’s more about inclusion than exclusion. Traditional investment decision-making evaluates investment risk and reward potential based on financial factors alone; sustainable investing takes a broader view. The sustainable investing process incorporates environmental, social and corporate governance (ESG) factors right alongside financial factors. The goal is largely the same: to generate long-term competitive financial returns and lower investment risk but with the added benefit of generating a positive societal impact.

A New Standard for Risk and Reward
ESG factors are industry specific. Commonly, they include such key issues as climate change, labor management, corporate governance, gender diversity, privacy and data security, among others. A consumer products company and a natural gas company, for example, may face different ESG risks and opportunities. This last word—opportunities—is key, because what O’Brien and other advisors practicing sustainable investing understand is that companies engaged in positive ESG practices often strengthen their financial health, leading to higher earnings and stock prices.

Several research studies have demonstrated the positive effect of socially responsible policies on the bottom line. Many companies display a lower cost of capital, lower volatility and fewer instances of bribery, corruption and fraud over certain time periods. As another example: in a 2016 survey,190 companies engaged in energy saving projects generated $8 billion in annual savings to the bottom line while also saving the energy equivalent of taking 45 coal power plants offline.

Stocks are not the only investment class where sustainable investing is effecting change. A leading bond credit rating agency, Moody’s Investors Service, now factors ESG considerations into its ratings for municipal, corporate and other bond and debt instruments.

A 2016 study on ESG and bonds by Barclays found “that a positive ESG tilt resulted in a small but steady performance advantage” and that “no evidence of a negative performance impact was found.”
(www.investmentbank.barclays.com/our-insights/esg-sustainable-investing-and-bond-returns.html)

Two Basic Approaches
In general, sustainable investing follows two main paths. The first, as described above, is including environmental, social and corporate governance criteria when analyzing investments and building portfolios. O’Brien investors have the option of investing exclusively in our ESG portfolio or as a part of their overall investment strategy.

The second is advocacy. Also known as shareholder engagement, advocacy refers to actions you can take as an investor and therefore part-owner of publicly traded companies. The most common form of advocacy is filing shareholder resolutions to raise ESG issues.

Advocacy in Action
For many O’Brien clients, advocacy is what first attracts them to sustainable investing. Through our investment partners, O’Brien clients have many opportunities to advocate for change.
Some recent examples of advocacy efforts that included O’Brien investors:
• Environmental:
O’Brien partner Calvert Investments led a multi-year engagement to encourage Colgate Palmolive to adopt more sustainable palm oil production practices. Outcome: sustainable production plan, completely eliminating forest clear-cutting.
O’Brien partner Domini Impact Investments led shareholder actions toward Lowe’s to stop sales of neonicotinoid pesticides that kill bees. Outcome: phasing out all neonicotinoid pesticides by 2019.
• Human Capital and Labor Management:
Following shareholder proposals and advocacy efforts by O’Brien partner Domini, clothing designer/manufacturer Michael Kors adopted employment protections for migrant workers to address modern slavery and improved labor requirements for suppliers.
• Policy:
Lobbying efforts by O’Brien partner Trillium Asset Management and others squashed recent efforts to rescind an Obama administration rule designed to reduce methane leaks by oil and gas firms operating on federal lands.

The O’Brien ESG Legacy
Socially responsible investing is here to stay. As Washington’s gridlock leaves many O’Brien investors disaffected with the government’s ability to solve problems, socially responsible investing—especially the advocacy piece—is providing a way not only to raise their voices, but to actively achieve direct change in corporations outside of legislation. Our clients are participating, and so are we. As of last summer, O’Brien is voting all proxy statements for the securities in our portfolio to promote positive, socially responsible change.

If you are interested in learning more about our sustainable portfolio and how it might fit with your personal investment strategy please contact your O’Brien Advisor.