An Evidence-Based Approach to Sustainable Investing (Second of Two Parts)

Whether they call it ethical investing or sustainable investing, a growing number of investors are concerned with “doing well by doing good.” Historically, investors who were philanthropically inclined had little choice but to seek financial returns through traditional investing, while separately expressing personal values by donating to charities.

Today, sustainable investing solutions are coming into focus for those who would like to begin combining these two, formerly disparate interests.


First the promising news: There already are ways to factor companies’ environmental, social and governance (ESG) ratings into investment strategies. Practitioners also continue to explore how impact investing—that is, more direct involvement in corporate governance—may lead to improved outcomes for all concerned. We are optimistic that evidence-based ESG investing can grow increasingly relevant as it matures and melds into our existing best practices.


Yet we face a noteworthy challenge in this emerging field: Strong, time-tested company reporting standards remain a work in progress among ESG practitioners. For example, one of the biggest decision-making challenges is the lack of comparability of reported information across firms.


To be fair, strong company reporting standards are a challenge for any evidence-based investment approach. But it can be especially daunting when an approach is relatively new and advancing faster than the rigor of proper academic analysis requires. Three of the “standard” growing pains sustainable investing faces are the need to build robust benchmarks, gather consistent data and cultivate solid research.


Benchmarks. Investors, advisors, and fund managers alike have been turning to ESG ratings to score organizations’ sustainable practices. Providers are creating a growing collection of ESG benchmarks for public consumption. Established providers include MSCI, Bloomberg, Thomson Reuters and others, and there are also many newcomers.   But different rating companies rank the same data in various ways. This isn’t necessarily bad, but it does mean investors and their advisors have to understand these differences and what they signify, or risk comparing apples to oranges.


Consistent data. Rating agencies, fund managers and investors face another challenge: The data used to score corporate ESG activities varies in dependability. ESG reporting remains mostly a voluntary endeavor. A 2018 Cerulli Associates survey of more than 400 advisors and asset managers found that the vast majority felt challenged by “the fact that companies provide limited or selective information about their efforts to meet ESG standards,” and that “the information they are given is too subjective.” Also, ESG is not one thing, but three things that are developing at different rates. While many environmental metrics are becoming increasingly standardized, there are indications that investors should be more cautious about social metrics, which often represent highly qualitative issues. Governance, on the other hand, is the most well-researched factor.


Solid research. There’s one more avenue to explore. How do we balance an investor’s desire to invest ethically with our fiduciary duty to advise them according to their highest financial interests? The goal is simple enough: We’d like to provide both. Existing studies and practical applications suggest we can. That said, it’s still early. It will take years, if not decades, to test evidence-based theories against changing market realities, and evidence-based sustainable investing is too new to have experienced this optimal degree of due diligence.


For example, consider “sin” stocks versus ethical investments. Which have actually delivered better returns, under what conditions, and with what risks? Our understanding of these important issues is still developing. Academics and practitioners alike are working to solve riddles and create the body of evidence needed to achieve a high standard of excellence.


We continue to collaborate with other evidence-based professionals and academics. Together, we hope to discover and deliver increasingly effective ways to incorporate sustainable investing into investors’ globally diversified portfolios.


At the same time, we understand that you may not want to wait decades to invest more sustainably. In fact, you may already be unwilling to invest otherwise. You deserve solid advice on how to make the most of today’s existing sustainable investment solutions as the future unfolds. Whether you’d like to get started right away, or simply remain informed, we stand ready to assist. Call us anytime to continue the conversation.