BACK TO THE BOUTIQUE INVESTOR BLOG The State of Sustainable Investing: Why It Has Staying Power Tara Doyle SENIOR VICE PRESIDENT, BUSINESS DEVELOPMENT & STRATEGIC MARKETING The choir of ESG critics has garnered ample attention in recent weeks. Meanwhile, client interest in sustainable investing keeps growing. What does this disconnect and the controversy erupting around ESG mean for the broader investor community? How can we expect the landscape to evolve? Incorporating environmental, social, and governance factors into a long-term investment outlook for a company is not a novel or radical idea; active managers have always sought to build a better mousetrap than the rest of the market. Climate change, demographic changes, and the advent of the omnipresent, internet-enabled free flow of information mean the risks and opportunities facing corporations today differ widely from those of the 20th century. Our expectations of corporations—both as consumers and investors—have shifted too. What Sustainable Investing Addresses The issue areas that sustainable investing addresses can be summarized by the three fundamental areas of ESG. Environmental considerations reviewed during the investment decision-making process include issues such as a company’s approach to climate change and biodiversity. Social factors can include company policies and practices around working conditions, human rights across supply chains, and the impact on local communities. And governance issues can include executive pay, data privacy, and board diversity. As demographics, geopolitical dynamics, and the Earth’s climate continue to rapidly change, investors increasingly view these issues as long-term systemic risks. Bloomberg Intelligence reports that ESG assets are expected to rise 43% (from year-end 2020) to $50 trillion by 2025—a third of all global assets under management.1 North America has long trailed Europe in ESG adoption but is catching up quickly: Morningstar finds that 7 in 10 U.S. adults are at least somewhat interested in investments that consider carbon emissions, labor practices, or regulatory and compliance history.2 The increasing focus on sustainability in Emerging Markets countries like China, which is fueling innovation in EVs, has opened a new frontier in sustainable investing. What Are the Advantages? The advantages of incorporating ESG criteria into risk management are clear; an ESG-integrated investment approach can identify and circumvent reputational risks before they become corporate scandals (and meaningful financial losses). Sustainable investing can also help investors identify long-term, top-performing companies. NYU Stern’s ROSI (Return on Sustainability Investment) methodology finds that paying closer attention to sustainability drivers like risk management, shareholder engagement, talent management, and innovation enables companies to drive revenue growth, greater profitability, and higher corporate valuation. A significant factor behind the growth of sustainable investing is that it allows investors to build investment portfolios that align with their values while avoiding companies and industries that do not. This is accomplished through tools like positive and negative screening that weed out companies to perform poorly on ESG risk criteria or actively tilt toward industries with high sustainability scores. Investors can also focus on specific themes like water, clean energy, or gender diversity. The Future of Sustainable Investing So, where does sustainable investing go from here? The story is unwritten, but one thing is certain: The drivers behind it are not slowing. According to Bloomberg NEF and J.P. Morgan Asset Management, global investment in renewables increased tenfold between 2004 and 2020—from $33 billion to $304 billion.3 With over 80 countries committed to ambitious emissions reduction targets by 2050, that pace will likely accelerate. Likewise, increasing focus on diversity, equity, and inclusion on earnings calls suggests businesses are aware of regulatory pressure and stakeholder interest. And as investors begin to focus on corporate policies around data and privacy,4 governance issues will become even more prominent, especially in areas like technology. LEARN MORE ABOUT BOSTON COMMON 1 Bloomberg Intelligence, ESG Assets Rising to $50 Trillion Will Reshape $140.5 Trillion of Global AUM by 2025, Finds Bloomberg Intelligence. 2 Morningstar, Who Cares About ESG Investing? 3 Bloomberg NEF and J.P. Morgan Asset Management 4 Bloomberg Law Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against a loss in declining markets. Investing involves risk including possible loss of principal. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for a long term, especially during periods of downturns in the market. This represents the views and opinions of Boston Common Asset Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader theme. Data is from what Boston Common Asset Management believes to be reliable sources, but it cannot be guaranteed. Boston Common Asset Management assumes no responsibility for the accuracy of the data provided by outside sources. While all information is believed to be reliable, AMG Funds LLC does not warrant this information to be correct or accurate and expressly disclaims any such warranty. This information may become inaccurate before it is updated. Applying ESG investment criteria to investments may result in the selection or exclusion of securities of certain issuers for reasons other than performance, and may underperform investments that do not utilize an ESG investment strategy. The application of an ESG strategy may affect an investment’s exposure to certain companies, sectors, regions, countries, or types of investments, which could negatively impact performance depending on whether such investments are in or out of favor. Applying ESG criteria to investment decisions is qualitative and subjective by nature, and there is no guarantee that the criteria utilized or any judgment exercised by an investment manager will reflect the beliefs or values of any particular investor. © Copyright 2023 AMG Funds LLC. All rights reserved.