From fashion to strength, sustainable investments are sweeping Wall Street
NEW YORK – Sustainable investing has overtaken fashion to become one of Wall Street’s most stable forces.
In the two years to July, month after month, investors sent at least $ 1.5 billion to funds that claim to be socially responsible or that use environmental, social and corporate governance criteria to perform their investments.
This is a far cry from other US equity funds, which have been rocked by titanic fluctuations in interest rates. In two of the three months during this period, more money came out of U.S. equity funds than it came in, according to the EPFR fund tracker.
This is the latest step in the evolution of so-called ESG investments, which have steadily grown in popularity even though they were once considered a mere niche. Some investors choose these funds because they want more stable returns going forward, while others just want their portfolios to be more in line with their values.
Of course, every boom brings opportunists.
Regulators have warned of some potentially misleading statements, such as companies claiming to be ESG-focused but holding shares in companies with low environmental, social and governance scores. It is reminiscent of how products along supermarket aisles are accused of “greenwashing” or presenting their products as “green” even if they are not.
But ESG and socially responsible investments are generally expected to maintain their strong momentum, or even accelerate. The world, after all, continues to provide more and more examples of how climate change affects business profits and losses.
Forest fires are burning parts of the country, while heavy rains inundate others. Meanwhile, the covid-19 pandemic continues to weigh on the economy, and a disheartening report on global warming released earlier this month called on the United Nations to declare a “code red for humanity.”
Environmental, social and governance investing is often stereotyped as something primarily for millennials and young investors, but experts say it appeals to baby boomers as well. It’s a big deal because they have the most money to invest.
“It is now a dominant theme,” said Cameron Brandt, research director at EPFR. “The main risk to the current trend is that it’s no longer that rambling voice on the sidelines. It’s now in the arena and I think it’s going to be judged by more established criteria.”
This includes the potential for higher fees. Measuring a company’s performance on environmental issues, as well as how it treats its workers and the rigor of its corporate governance policies takes research and work. And that can lead to higher expenses.
Interest in environmental, social and governance investing has been strong enough that US SIF, a group that advocates for sustainable investing, recently updated its guide for investors looking to get started.
It also offers a free online course for people who want to learn the basics of sustainable investing. The group has heard accusations of greenwashing against the industry.
The organization claims that a fund that does greenwashing – or distorts what it does – is different from a fund that takes a lighter touch on environmental, social and governance investments. This is something that is becoming more and more prevalent as the field expands.
Some funds, for example, undertake not to hold shares of companies considered to be dangerous or unpleasant. Others will try to own only the companies that achieve the highest scores in the markers on environmental, social and corporate governance issues.
Yet others try to buy only the companies that score high in their specific industry, even if the score is very low overall.
“I think it’s important that any type of fund, whether it’s an ESG fund or a small or mid-cap fund, expresses with precision or transparency what it does,” said Lisa Woll, CEO of US SIF. “As long as you do what you say precisely, it’s fine. But that’s why you read a flyer.”