How to make an impact with sustainable investing

The question of how to build a sustainable, equitable future is reverberating through the corporate world, and it’s a challenge that deserves thought from both a professional and personal perspective.

According to the Morgan Stanley Institute for Sustainable Investing, nearly half of individual investors and 80% of asset-owner institutions in the US have adopted sustainable investing practices.¹ A better understanding of sustainable investing can help you begin to engage with this topic in your financial decision-making.

In early 2021, more than one out of every three dollars under professional management is invested according to sustainable and impact investment strategies, but sustainable investing can mean many things.²

At its root, sustainable investing seeks competitive financial returns while also holding companies to higher standards in terms of reporting as well as how their business practices affect the world around them. Along with traditional financial metrics, a company’s performance is measured through socially responsible investing (SRI) or environmental, social, and governance (ESG) criteria, baking in business resiliency and broader societal interests along with strong financial returns.

Traditionally, SRI involved negative screening, or cutting certain companies or sectors out of a portfolio to align with personal values or social priorities—for example, avoiding alcohol, tobacco, or firearms companies—or constructing religiously themed portfolios, which generally avoid investments that do not align with beliefs. In contrast, ESG focuses on corporate ratings in environmental, social, and governance metrics like a company’s carbon footprint, workforce diversity, or whether the board of directors includes outsiders who have no connections with corporate management, and so might more objectively represent shareholder interests.

Today, our concept of sustainable investing often refers to products or portfolios that incorporate ESG criteria, which can have a meaningful effect on long-term investment risk and return. According to the Morgan Stanley Institute for Sustainable Investing, sustainable funds that target strong ESG performers weathered the coronavirus pandemic better than portfolios without an ESG focus, reducing risk and outperforming their peers in 2020.¹

In fact, according to Morningstar, sustainable investments were outperforming their peers long before 2020, with 75% ranking in the top half of their category for the trailing three years and 69% in the trailing five years.³ Additionally, Nuveen TIAA Investments found no statistical difference between the returns of leading SRI equity indexes and broad-market benchmarks—and similar risk.⁴

In short, numerous studies have indicated that an SRI performance trade-off, if there ever was one, may no longer exist.

Global ESG assets are expected to hit $53 trillion by 2022, so sustainability will continue to loom large in conversations around corporate responsibility and personal financial planning.⁵ Both as a corporate leader and individual investor, it’s helpful to approach sustainable investing as an opportunity to add value.

As with any investment approach, you’ll need to consider your unique goals and key values when considering sustainable investing. E*TRADE Executive Services is here to help, and if you’re not sure where to start, consider these steps to help orient yourself within the sustainable investing space:

Step one: Take a deep dive into research

Build your knowledge through resources such as the Morgan Stanley Institute for Sustainable Investing and the Forum for Sustainable and Responsible Investment (US SIF), which contain a wealth of educational resources.

You can also explore tools that help rank investments according to ESG criteria to get a sense of what is out there and how different companies and investment vehicles are measured—like ESG rankings from analysts and thought leaders such as Morningstar, BlackRock, and Vanguard, or thematic funds that focus on specific categories like clean energy and water. While not a complete picture or basis for an investment decision, tools like these can help you gain insights and think through your own priorities.

Step two: Get granular about your values

As you expand your research, take note of what interests you and ask questions about your lifestyle and the goals that matter most to you. This can help you zero in on the investments that best reflect your values and support your goals. For example, is there a particular ESG subtopic that matters most to you—like racial justice, gender equality, or corporate transparency?

Step three: Consider various sustainable strategies

As you begin to refine your approach, you may want to investigate different possible approaches to sustainable investing:

• Divestment vs. activism: Would you rather avoid exposure to certain companies and sectors that conflict with your values, or work from within as a shareholder activist to help build better companies?
• Active vs. passive: Are you looking to collaborate with a financial manager or handle your own investments? Sustainable investments come in many forms, including actively managed funds, managed portfolios, or passive investments such as ETFs.
• Thematic and impact investing: Some sustainable financial products are created around a certain theme or focus on a specific area of the market or the world, like clean water or emerging economies. Depending on your wider financial strategy, you might consider how these kinds of investments can play into a diversified plan appropriate for your goals.

Step four: Don’t ditch diversification

As you begin to organize your goals, don’t forget that you’ll want to build a well-diversified portfolio that balances your sustainable causes and your overall financial needs.

ESG-focused portfolios and products can look a bit different than their traditional counterparts. For example, ESG products generally have less exposure to very large companies that may have violated environmental or social norms, or very small companies that haven’t achieved meaningful diversification of their board. They also might have less exposure to certain areas of the market, such as fossil fuels.

Bearing this in mind, consider how to pursue your sustainability goals without sacrificing overall portfolio diversification. Think about how much of your portfolio you would ideally like to allocate to SRI or ESG strategies and look carefully for opportunities that align with your financial performance objectives. 

Step five: Leading, sustainably

Companies need engaged corporate leaders to become engaged corporate citizens: Don’t be afraid to bring questions about sustainability into the workplace. And in terms of your chosen investments, find out where a company stands on the sustainability spectrum, what it’s doing to move the needle—and what you can do to help. Engaging as a shareholder through proxy votes can also be a powerful way to pursue ESG values and help shape the strategic direction of the companies you believe in.

Today, there’s no such thing as a carbon-neutral portfolio or a flawless corporate ESG rating, but individual investors can do more than ever to make their values felt in the financial markets.

At E*TRADE Executive Services, we see interest in sustainability continuing to grow among investors, and we are here to help you align your financial life with your values. Our team of licensed and trained Relationship Managers are available to assist you in your journey with sustainable investing. To learn more, visit etrade.com/execservices, or reach out to us directly at 800-838-0908 or executiveservice@etrade.com.

1. Morgan Stanley Institute for Sustainable Investing, “Sustainable Funds Outperform Peers During Coronavirus,” Feb. 24, 2021.
2. The Forum for Sustainable and Responsible Investment (US SIF), “Sustainable Investing Basics,” accessed Feb. 10, 2021.
3. Morningstar, “Sustainable Funds US Landscape Report,” 2021.
4. Nuveen TIAA Investments, “Responsible Investing, Delivering Competitive Performance,” July 2017.
5. InvestmentNews, “ESG assets expected to top $53 trillion by 2022: Celent – InvestmentNews,” Sept. 15, 2020.  

Past performance is not an indication of future results. Investing in securities involves risk, including possible loss of principal.