Sustainable Investing is an Active Process
June 30, 2020
Sustainable investing is experiencing strong growth, both in assets under management and in investor acceptance. Total U.S.-domiciled assets under management using sustainable investing strategies rose from $8.7 trillion at the start of 2016 to $12.0 trillion at the start of 2018, a 38% increase. At the same time, interest in passive investing has also been increasing, and it’s not surprising there has been a movement to combine the two approaches. Both traditional active approaches and the newer hybrid approaches assess the importance of sustainability issues and how firms are managing the risk posed by these issues. However, the two approaches use very different methodologies for making those assessments.
A recent research paper from the Active Managers Council, “Sustainable Investing is an Active Process,” compares the two approaches. Its central insight is that sustainable investing inherently involves active decision making. The paper also finds that the long-term focus of the traditional actively-managed approach helps investors to align their portfolios with their sustainability goals while allowing for a more nuanced consideration of quantitative and qualitative factors, ultimately helping investors tailor their portfolios to those very same sustainability goals.
In addition to integration with investor goals, actively-managed approaches to sustainable investing focus on a tailored assessment of individual investments, a future-focused evaluation of risk and opportunity, a holistic approach to portfolio risk management and a long-term commitment to stewardship. These activities supplement insights from sustainability ratings, which serve only as a starting point of analysis. In sum, active approaches take the long view, assessing not just short-term risks but also the direction of long-term trends.
Key findings include:
- Sustainable Investing is Inherently Active – Sustainable investing inherently involves active decision-making that begins with an assessment of the materiality of sustainability issues.
- Active Approaches Take the Long View – The in-depth nature of the active research process makes it possible for advisers to assess not just short-term risks that are visible in the current data but, even more importantly, the direction of long-term trends and how they will affect companies.
- Traditional Active Approaches Help Investors Align with Their Goals – The active approach is adaptive – able to react to innovation and changes in the environment and to quickly evaluate how they impact the achievement of investor goals.
The traditional active manager engages with corporate managements around their efforts to address sustainability risks. Active managers can focus on the issues that are most consequential for a particular company. By encouraging managements to address these key issues, active managers help companies improve performance which, in turn, boosts investor returns. Active managers also consider how changes in the sustainability landscape intersect with investor goals.
Ultimately, it’s important to note that sustainable investing isn’t ‘set it and forget it.’ The materiality of sustainability issues is changing constantly. As such, active managers can help investors stay on top of these changes and achieve their long-term goals.
 Source: US SIF, 2018 Report on US Sustainable, Responsible and Impact Investing Trends