With the rise of Big Data and increases in computing power, analyzing more data has become feasible in a variety of fields. It has impacted investing through the rising popularity of sustainable investing. Almost $9T is invested in sustainable investments in the US as of 12/31/16, up 33% in just two years. This type of investing evaluates a host of other metrics about companies, in addition to the standard financial metrics, in determining which companies might make the best investments. The additional metrics evaluated tend to fall into three broad categories of Environmental, Social & Governance, commonly known as ESG. One industry expert likens sustainable investing to using GPS instead of a paper map for navigation in a car. If better data and technology are available, why not use them? In investing, why limit oneself to only looking at financial metrics about a company, when a host of other metrics exist to give one a better sense of the investment merit of a stock?
Sustainable investing is often confused with traditional Socially Responsible Investing (SRI). This type of investing rose to prominence in the apartheid era when investors divested of companies doing business with South Africa. In its traditional sense, SRI investing is about eliminating certain industries or types of companies from a portfolio. The classic SRI screens eliminate companies in the alcohol, tobacco, gambling and weapons industries. By contrast, sustainable investing focuses on identifying companies that are doing well by various metrics and owning more of the “good” companies, rather than focusing on eliminating “bad” companies.
Another common misconception is that one must sacrifice returns in order to invest in this way. While that might have been true when the industry was in its infancy and focused primarily on eliminating bad companies, with fewer fund choices and higher fees, it is no longer the case. In fact, there are over 1,000 studies that demonstrate sustainable investing earns at least market rate returns. In fact, several studies show that sustainable investing actually earns market rate returns with lower risk due to the fact that companies with bad practices which might lead to lawsuits score poorly on ESG metrics.
For clients interested in this type of investing, there has never been a better time.