The Sustainability Smile

An Advisor's Guide to Defining Sustainable Investing Strategies

In the context of investing, the term 'sustainability' lacks sharply defined boundaries. This broad label tends to create more confusion than clarity, prompting some advisors to simply skip it and move on. We suggest sustainability is worth a second look: institutional and private clients express interest with increasing frequency, and assets aligned to sustainable objectives are currently in excess of $59 trillion.1

To help you familiarize yourself with this growing segment, we provide ‘The Sustainability Smile’ — a visual tool that can help simplify and guide your conversations with current and prospective sustainability-minded clients by breaking down sustainable investing into digestible categories. Here you'll find an overview of what sustainability is, ways to incorporate sustainable investing into your client engagements, and, more importantly, how to identify the important cues that your clients may be interested in sustainable investing despite having difficulty articulating it.

Experience tells us that clients show far more certainty in knowing what they do not want than what they do want. If you are willing to familiarize yourself with this growing segment, you will find advantages to better position your practice in serving these clients' interests when and if the time comes.

Why Sustainability?

Sustainable investing expertise adds value to your practice. It can help you better serve and retain existing clients who may decide their investments should better reflect their personal values. Broader knowledge of sustainable investing can differentiate your practice from your competitor's, helping you develop prospecting engagements. Additionally, these types of engagements may result in "stickier" and more substantial relationships because they include a "softer side" that shifts the advisory relationship away from a price-based, commoditization of your products and services toward a more customized, client-focused advisory practice model.

Sustainability Overview

Sustainable and responsible investing has a rich history spanning over 250 years. Perhaps its earliest founding reference came from Pastor John Wesley whose 1758 sermon "The Use of Money" outlined the early tenets of social investing: Do not harm others through your business practices and avoid industries that can harm the health of others.2

Social investing remained largely unchanged until the early 1980s, relying mainly on negative screening that seeks to exclude specific industries or companies, such as alcohol or tobacco, deemed inconsistent with the investor's value set. As socially responsible investing evolved, investors took on more of an advocacy role by proactively seeking companies engaged in better or preferred business practices. Propelling this shift, General Motors board member Reverend Leon Sullivan strongly supported the South African Apartheid Divestment Campaign.3 Such investment considerations, known as positive screening, seek to identify investment opportunities based on comparative ESG and financial considerations relative to their peers.

The enormous amount of assets committed toward the integration of environmental, social, governance (ESG), and other social screenings demonstrates increasing traction with investors. Sovereign and pension funds are among the largest practitioners of sustainable and responsible strategies. When you consider that pension fund advisers manage to a multigenerational investment horizon, with debt issue maturities spanning multiple decades, the concern toward resource scarcity makes sense.

Today's sustainable and responsible investing exhibits greater robustness and familiarity among the investing public and institutions. As consumer preferences have trended toward healthy eating, healthier living, and a greater emphasis on community ties, so has the concept that investments can or should 'do good' as well. A recent Morgan Stanley survey titled "Sustainable Signals" found that 71% of individual express interest in sustainable investing, and nearly two-thirds believe sustainable investing will continue to grow over the next five years.4 A client who says "I want better companies" or "I am looking for companies that are doing some good" provides subtle cues of potential interest. Being prepared to discuss sustainable investing will help position your practice when that time comes.

The Sustainability Smile

The Sustainability Smile is a visual tool designed to help you discuss sustainable investing with your existing and prospective clients. It separates the broad and nebulous label of "sustainability" into five strategies with soft boundaries along a continuum from traditional finance to philanthropic investing. The Smile provides a framework to help you think about client engagements, potential investment strategies, and their respective product offerings. Please note that the positions of the differing strategies and general shape of the smile do not imply any specific investment outcome or predict any particular rate of return.

Traditional Finance

Traditional finance reflects current mainstream investment practices where no considerations regarding material ESG factors, negative screening, or positive screening take place. Investors in this camp focus solely on maximizing financial gain with little or no interest in broad stakeholder interests. These investors may comment that they would rather donate the gains. Milton Friedman best characterized this view when he stated that "there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays in the rules of the game, which is to say, engages in open and free competition, without deception or fraud."5 Such investors typically include hedge fund equity activists.

This investment process is relatively straightforward since it requires very few or no additional considerations.