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“Goodness is the only investment that never fails.”
Henry David Thoreau
Aligning investments with values
Due to today’s market uncertainty, it may be an appropriate time to evaluate your portfolio. If you are looking more closely at aligning your portfolio with your principles, you may want to think about sustainable investing.
Sustainable investing is a broad term that describes how investors may align their portfolios with their principles; this can include an approach focused on environmental, social, and governance (ESG) criteria; impact investing; and/or socially responsible investing.
Sustainable investing aligns portfolios with ethics, beliefs, and ideals
ESG analysis. Seeks to manage risk by integrating ESG factors that influence both financial performance and society at large.
Socially responsible investing. Seeks to avoid industries and companies that are not in alignment with an investor’s values, primarily through exclusions.
Impact investing. Intends to generate an identifiable and measurable impact, in addition to a financial return.
The sustainable investing landscape
Often environmental, social, and governance factors are intertwined
Performance of sustainable investments
Our research indicates that investors do not need to forego return potential to align their portfolios with their values. On the contrary, a growing body of evidence suggests that financial performance of companies using ESG strategies is commensurate with that of those that do not. In fact, more than 90% of the 2,200 individual studies reviewed by the Journal of Sustainable Finance & Investment have shown a nonnegative relationship between ESG and corporate financial performance, with a majority of findings showing positive results.
ESG-related stocks have tended to keep pace
Our research has shown that ESG-related stocks have shown comparable returns to non-ESG-related stocks over time, adjusting for fundamental differences such as style and sector.
This chart shows that, between 2015 and 2019, the MSCI All Country World Index, MSCI All Country World ESG Leaders Index, S&P 500 Index, and S&P 500 ESG Index all saw similar performance. In fact, the ESG-related indices outperformed the non-ESG indices in recent years.
Sources: Bloomberg and Wells Fargo Investment Institute, as of December 31, 2019. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment.
Please see the end of this report for the definitions of indices and descriptions of asset-class risks.
Learn how to grow your own sustainable investment strategy.
Investor demand has been a key growth driver for sustainable investment strategies, and managers have risen to the challenge. Sustainable investment assets under management (AUM) have doubled since 2007. Additionally, 69% of investors would choose to use these types of investments in their retirement accounts if they were given the option to do so, according to the Wells Fargo/Gallup Investor Retirement Survey, February 2020.1
Between 1996 and 2019, both the amount of assets under management (AUM) in sustainable investment funds and the number of sustainable investment funds has steadily increased.
AUM (in billions)
Source: Morningstar Direct, Wells Fargo Investment Institute, as of September 30, 2019. AUM = assets under management
1. The Wells Fargo/Gallup Investor and Retirement Optimism Index poll was conducted online February 10-16 using the Gallup Panel, a probability-based longitudinal panel of U.S. adults. The results are based on 1,029 investors aged 18+ with $10,000 or more invested in stocks or bonds, either individually or as part of a retirement or mutual fund.
Trends to watch
Strategists at Wells Fargo Investment Institute recommend that investors interested in sustainable investing keep an eye on these four emerging trends.
For the past several decades, the assumption has been that fossil fuels will continue to be the main source of energy, with increases in carbon-intensive assets making it difficult to attain climate goals set by the Paris Agreement. We believe that the trend will be changing to a more clean energy source. Emerging technology, integrated with new policies that limit the use of carbon, likely will take shape over the next several decades.1 We believe that lower production costs and the opportunity to scale in emerging markets via disruptive technologies will be the main levers to enable a transition to renewable energy sources.
Implication for investors
We favor investing in companies that focus on disruptive technologies, such as long-duration batteries, electric vehicles, and wind and solar technology.
1. “The Speed of the Energy Transition: Gradual or Rapid Change?”, World Economic Forum.
According to International Data Corporation (IDC), the Internet of Things (IoT) and increased connectivity to the IoT will generate 79.4 zettabytes (1021 bytes) of data by 2025.1 Increased use of cloud technology and data centers has introduced a new role within firms’ C-suites: the Chief Data/Information Officer. A survey of approximately 60 Fortune 1000 firms, conducted by NewVantage Partners, reported that 67.9% have appointed a Chief Data/Information Officer.2 This indicates a trend of viewing data as an asset, giving rise to the importance of data protection and privacy.
Implication for investors
We favor investing in companies that have strong data regulation and governance policies in place within the subsectors of data science and analytics.
1. “The Growth in Connected IoT Devices Is Expected to Generate 79.4ZB of Data in 2025, According to a New IDC Forecast”, IDC, June 18, 2019.
2. “Big Data and AI Executive Survey 2019,” NewVantage Partners, January 2, 2019.
Cruelty-free investing excludes investments in corporations that exploit and abuse animal rights. This methodology avoids corporations that manufacture food, beverages, or clothing containing animal products; use animals for experimentation and testing; and are involved in killing or harming animals.1
Implication for investors
We favor companies that are advocates of animal rights and create products, such as plant-based proteins, without exploiting or abusing animals.
1. Crueltyfreeinvesting.org, February 12, 2020.
This is an accounting method that attempts to factor environmental costs into the financial results of operations. The aim is to help businesses understand and manage the potential balance between economic and environmental goals.
Implication for investors
We favor investing in companies that have made commitments to achieving sustainability goals and reducing carbon emissions.
Grow your sustainable investment strategy
Sustainable Investing: Investing with a purpose includes more information to help investors understand the opportunities with sustainable investing, including:
How to grow your sustainable investment strategy
Sustainability plans for small-business owners
A detailed look at ESG investing
A five-category analysis of ESG portfolios and products
Wells Fargo Investment Institute is home to more than 120 investment professionals focused on investment strategy, asset allocation, portfolio management, and alternative investments. Its mission is to deliver timely, actionable advice that can help investors achieve their financial goals.
For additional insight and market commentary, visit our website. For assistance with your investment planning or to discuss the points in this report, please talk to your investment professional.