RP: An important development in the financial industry in recent years has been the growth of sustainable investing. But what exactly does it mean? Here’s Dan Lefkovitz from Morningstar.
DL: We define sustainable investing rather broadly. We consider it to be a long-term investment approach that incorporates environmental, social and governance criteria - ESG. And, it can range from sort of old-fashioned, exclusionary screening, like you might’ve seen in an ethical or socially responsible fund. Avoiding stocks of alcohol, tobacco or gambling companies, perhaps coal. It can also be just integrating ESG factors into the overall investment analysis. And that sort of integration is actually the most popular form of sustainable investing today.
RP: Passively managed funds are very cost-effective, but, by definition, they generally invest in the whole market. So, is there a conflict between passive investing and sustainability? Dan Lefkovitz says, on the contrary, they complement each other well.
DL: It’s interesting, you might think that, but in fact, we’ve recently seen quite the opposite. So, we’ve seen big passive investment managers, the likes of BlackRock, Vanguard, and StateStreet become a lot more active with the companies that they own, simply because they are replicating an index. Now you are seeing passive investment managers who have to own these companies and feel like they’re sort of suck in a long-term relationship with no option for divorce, be more active when it comes to their ownership.
RP: If you want to combine passive investing with sustainable investing, there are funds available — particularly exchange-traded funds — that effectively do both.
DL: We actually think that sustainable investing lends itself very well to index funds and to exchange-traded funds. The kinds of positive and negative screens that are typically employed with sustainable investing actually fit very well in index and exchange-traded fund format. There also seems to be an alignment between the demographic that sustainability appeals to and the exchange-traded fund. Younger investors like sustainability and they also like exchange-traded funds.
RP: Of course, all investors are ultimately looking for good returns. So, is there is a price to pay for investing with your conscience?
DL: The number one frequently asked question we get about sustainable investing is: “Do you sacrifice returns if you are investing sustainably?”. And, interestingly, maybe in theory if you’re limiting your universe and not investing in certain companies because they’re not sustainable, that would be limiting. In practice, our data show, that sustainable funds perform on par with their non-sustainable counterparts. There is even some evidence to show, that sustainable investing leads you to companies that are poised for outperformance.
RP: That’s it. Thank you to Dan Lefkovitz from Morningstar.
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