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There are many reasons why one decides to invest in a particular investment – promising fundamental outlook, technical signals, emotional attachment, or learning.


For example, a few years back my wife and I decided to educate my step-daughter on investing. So, we determined the best way to teach her is to invest in a company that she could follow. Knowing that girls love and can relate to all things Disney, we invested a monetary gift she received in shares of Disney. Since our primary objective was to teach her about the fundamentals of investing, we made the purchase without looking at one piece of analysis.


Months later we believed we accomplished our objective. In addition to the excitement of the increasing value in the shares, she also enjoyed walking around DisneyLand, saying she “owned Disney”.


Another type of investment analysis that has been growing in popularity over the years, and is much more involved and scientific then my educational example above, is based on investing in socially and environmentally responsible companies. Historically, this investment strategy was referred to as “socially responsible investing” (SRI), in recent years this strategy has evolved to “environmental, social and governance” (ESG) investing.


Below we look at the current landscape of SRI/ESG investing, the growing popularity amongst financial advisors and their clients, and look at some of the top performing managers in this space.


ESG investing was thrust into the spotlight when President Trump decided to withdraw from the Paris climate agreement. Environmental responsibility and reducing carbon footprints have gained great corporate momentum over the years, even though the announcement made for a somber day around the globe, U.S. participation in the climate accord will not slow the momentum. Investor actions will have a heightened role in corporations reducing carbon footprints, void of government regulation and support.


According to EPFR Global, investors continue to pour money into SRI/ESG mutual funds and ETFs (Figure 1). Ending June 21, investors have funneled over $5.4 billion into SRI/ESG funds year-to-date. The withdrawal from the Paris accord didn’t slow flows either, as investors poured an additional $1.35 billion into SRI/ESG funds since June 1.


Figure 1

In a recent survey,[1] over 600 financial advisors provided insight on the driving forces behind the demand for SRI/ESG investing. 65% of the respondents said they offer SRI options to their clients, with most of the demand being driven by Millennials. Environmental concerns are the number one concern driving clients to SRI funds, followed by human rights and traditional negative screens such as guns, tobacco, and gambling.


The number of SRI/ESG investment options for individuals is also growing. In the same survey, financial advisors were asked what investment vehicles do they use to gain exposure to SRI/ESG strategies. Mutual funds are the most commonly used product at 77%, while ETFs (40%) and separately managed accounts (28%) were also mentioned. Not only are SRI/ESG investments growing in popularity, so are separately managed accounts (SMA).


When looking at the inherent benefits of SMA’s - increased transparency and customization, professional investment management, and enhanced tax strategies - one can see why SMA’s are an ideal investment vehicle for investors looking to invest in environmentally conscious companies. Investors may have different ideas of what constitutes a socially and/or environmentally conscious company, so the transparency and customizability of SMA’s helps with the ambiguity of SRI/ESG classifications.  


In figure 2, we display some of the top performing SRI/ESG managers over the past five years from the PSN Global Manager Neighborhood database. As you can see, these strategies hold their own based on return, risk, and return-risk metrics against the broad, S&P 500 index.


Figure 2

Individuals and corporations alike are putting a greater emphasis on reducing their carbon footprint, which provides investment opportunities for investors. As you can see from figure 2, investment management companies are listening, as they are providing investors with an expanding array of compelling stories.


Today’s investment world is evolving to make it easier and more accessible for financial advisors to help their clients achieve their investment objectives. Just like how SRI has evolved into ESG, investment analysis methodologies have also evolved, so have our family discussions regarding investing. They have morphed from, “wow, look how much Disney is worth” to, “why didn’t you invest in Amazon?”  Ahhh.. lesson learned. 

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