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Smart Investor – July 2017

Research, Trends, Topics and Asset Class Returns for Long-term Investors.

Focus on Sustainable Investing 


On a recent study tour of the US, we met with ABACUS Wealth Partners, whose investment approach is based on sustainable and socially and environmentally responsible principles.

ABACUS is a very successful financial advisory firm based in Santa Monica, California, managing over $2 Billion of client funds, all directed to these socially responsible strategies.

The first challenge in understanding socially responsible investing is to understand the acronyms. Firstly, SRI stands for ‘sustainable’, ‘responsible’ and ‘impact’; while ESG stands for ‘environmental’, ‘social’ and ‘governance’.

Socially responsible might refer to investment screens that reduce or eliminate investments in areas like; armaments manufacturing, tobacco, alcohol or child labour. Environmental screens will focus on reduction in fossil fuel emissions, energy efficiency, pollution prevention, recycling and others.

Governance, refers to the way a corporation behaves as a corporate citizen, its commitment to longer term thinking, and the quality of its governance in protecting the rights of shareholders.

In a nutshell, SRI/ESG investing is about how a company makes its money, not just how much money a company makes.

According to ABACUS, each of us runs our own moral compass when it comes to what we define as ‘irresponsible’ behaviour, and socially conscious investors are increasingly wrestling with how to integrate their social and environmental concerns into their investment portfolios.

In our own firm, we are increasingly speaking with clients who want the world to be a better place, but not at the expense of their own financial security. So, the question is: can a socially conscious investor contribute to a better world without sacrificing investment returns? Increasingly, the answer seems to be, Yes!

Between 2014 and 2016, assets to which managers have applied SRI/ESG criteria have increased from $4.8 trillion to $8.1 trillion.1 Research shows that female investors and Millennials are more likely to lead the way then it comes to investing sustainably. Research from BT Australia indicates that nine-in-10 investors are concerned about sustainable investing, suggesting it’s not just the ‘greenies’ who care.

As far as returns go, it is very early in the debate to make a definitive assessment, however there is a growing chorus of opinion suggesting that there is a positive relationship between ESG standards and the financial performance of companies. A review of over 2000 studies on the subject conducted by Hamburg University and Deutsche Asset Management found that the business case for ESG investing is empirically very well founded.2

For our part at Capital Partners, SRI/ESG investing is an active research area as we seek to establish how to offer SRI/ESG strategies for clients in an efficient and cost-effective manner, while maintaining our commitment to build portfolios using evidence based principles to maximise expected return. We will certainly keep you posted.

If you feel strongly about investing more responsibly, we’d love to hear from you, so please get in touch and tell us what you think.

Asset Class July 17

1Forum for Sustainable and Responsible Investment. www.ussif.org
2 Gunnar Friede, Timo Busch & Alexander Bassen (2015) ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment, 5:4, 210-233, DOI: 10.1080/20430795.2015.1118917

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