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By Cammy Smith, May 19, 2019 You have seen the acronyms and heard the buzz. But, you are left just a confused as when you started! Sustainable Investing. Green Investing. SRI and ESG. How do they go together, what does it all mean, and why does it matter for you and your clients? Continue reading to understand the importance and key differences among investment strategies. Did You Know? One in every four investable dollars in the U.S. is deployed into some sort of SRI strategy (US SIF). Adoption of SRI and ESG strategies is growing at an unprecedented rate. According to the US SIF, sustainable, responsible, and impact investing experienced a growth rate of more than 38% from 2016 to 2018*. SRI now represents about $12 Trillion of all assets under management 26% of the $46.6 trillion in total assets (Cerulli Associates). Why all financial advisors should pay attention to SRI Growing importance with investors, asset managers, and companies Awareness continues to grow at an astounding rate. Consumers and investors are demanding more transparency and a focus on fair business practices. Companies are the most vulnerable to reputation risk they have ever been due to global connectivity, technology, and social media. The climate is in poor shape: the 2018 U.S. Climate Assessment results were the most devastating they have ever been, and extreme weather patterns continue to cause devastation and financial loss across the globe. As a result, the Investor > Asset Manager > Company value chain is now a web in which all parties influence one another more than ever. And, many investors want to put their money where their mouth is: 71% of individual investors and 87% of millennial investors have expressed interest in investing using SRI strategies**. The Business Case for SRI We can talk about our environment, climate change, and social inequality issues all day long. But, even in the most cynical perspective, we can take the altruist argument out and only focus on the economic impacts of SRI consideration: risk and risk mitigation, profits and performance, and fiduciary responsibility. Profits, Performance, and Risk By not thinking SRI, you may be giving up returns for your clients. With risk mitigation, business costs and practices become more predictable. This inevitably helps company profitability and thus stock performance - both in the short-term and long-term. Study after study is demonstrating the risk-adjusted performance across asset classes and sectors is on-par or better for SRI related strategies. ESG practices are the foundation of business sustainability which translates into long-term sustainability in society. By not paying attention, companies are taking undue risk leaving themselves vulnerable to reputation risk (impact on stock performance) in the short-term and business sustainability in the long-run. Pulling the cord even further, this means that investors may ultimately be prone to these similar risks. From a pure performance perspective, SRI strategies have been performing on-par or better than their peers across most geographies and asset classes. In fact, a 2016 study looked at ESG companies across industries, and found that in 8 out of 12 industries, the ESG investments out-performed peers by an average of 14%. This calls into question the age-old notion that higher risk investments will yield higher rewards. Instead, the study suggests that lower risk ESG investment may be the way to maximize returns within certain industries. Additionally, according to Morningstar, we found that 41 of the 56 Morningstar’s ESG indexes outperformed their non-ESG equivalents (73%) since inception.*** Your (Fiduciary) Responsibility By focusing only on financial metrics, asset managers and advisors are neglecting the complete picture of security selection. Let’s draw a corollary with assessing an individual investor’s objectives. Would it make sense to recommend a portfolio without first understanding a client’s short- and long-term goals? Risk tolerance, time horizon, and liquidity needs? Employment situation, past investment experiences, and major life events? Health factors, family need factors, family health history? Goals, dreams, and fears? So it’s the same from an investment context perspective: if we only rely on financial metrics without greater context, we may be ignoring signals, risks, and underlying factors that are imperative. By not bringing up the conversation, we may be neglecting to understand values, ideals, and goals of our clients that impact their long-term situation. As fiduciaries, we are responsible for the greater picture. So, what exactly is SRI? Sustainable and Responsible Investing (SRI) is an investment strategy that seeks to maximize financial return, while supporting a cause, with the goal of making a positive impact in the world. The original definition of ‘SRI’ began as Socially Responsible Investing. Socially Responsible Investing was well-known throughout the 1960s into the early 2000s, and it came to be known as a negative, exclusionary or avoidance approach. For example, strategies would avoid or exclude and of the ‘sin stocks’ such as firearms, tobacco, alcohol, pornography, fossil fuels, or a complete sector altogether. The term is still used by many to describe what we now refer to as Sustainable and Responsible Investing. Now, the most widely accepted and umbrella term of SRI has evolved into ‘Sustainable and Responsible Investing.’ In general, SRI is considered to be a broad reference for any investment strategy that seeks to maximize return while benefiting the world - whether it is an avoidance strategy, a positive inclusion strategy, or focus on a particular cause You have surely heard about SRI, green investing, sustainable investing, and socially responsible investing. But what do these all mean and how are they related? Here’s a rundown on terminology and key practices under the SRI umbrella that all Financial Advisors should know when talking with clients. Key Practices Under the SRI Umbrella ESG Integration = An investment practice that focuses on the inclusion or exclusion or Environmental, Social, and Governance [ESG] factors in a portfolio or security selection. Environmental factors are the underlying criteria that focus on climate change, CO2 emissions, sustainability, overall impact on the environment. Social factors give consideration and measurement of diversity, human rights, worker protection, and consumer protection. Governance criteria speak to management structure, executive compensation practices, employee relations, board of directors diversity and practices. Sustainable Investing = An investment practice that is rooted in the alignment of sustainable business equals a sustainable world + society for the long-term. Green Investing = An investment approach that focuses on reducing carbon footprint and conserving natural resources. Impact Investing = An investment practice that is (usually) values-based. Impact Investors may be willing to sacrifice some return for the cause.

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