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By Jon Hale, Ph.D., CFA and Jeremy Glaser | 03-10-2016 03:00 PM

Should Investors Care About Sustainability?

Investors who want to have an impact may wish to allocate their capital to companies and funds that are better sustainability performers, says Morningstar's Jon Hale.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

We recently launched a Sustainability Rating for funds, and I'm here today with Jon Hale, our Head of Sustainability Research, to talk about how the sustainability field has changed over the past few years and why individual investors should care about it.

Jon, thanks for joining me.

Jon Hale: Thank you.

Glaser: SRI funds, socially responsible funds, have been around for a long time, but now we are hearing more about ESG [environmental, social, governance], sustainability. We're bringing out this new rating. How has the field changed in the last couple of years?

Hale: It's actually evolved quite a bit over the last couple of decades. If we were sitting here in circa 1996 rather than 2016, we'd be talking about socially responsible investment funds, which tried to reflect the values of the underlying investor through primarily exclusionary screening of their portfolios. The classic [exclusions] were the sin stocks: tobacco, alcohol, gambling. The whole idea was to make the investor feel better about aligning his or her investments with their values, and a lot of it was institutional investors who wanted to align their portfolios with the mission, whether they were religious investors or something similar.

Today sustainable investing, and what we call ESG, is actually a lot different, although it has evolved from SRI. Today when we talk about sustainable investing, we are really talking about how to incorporate environmental, social, and governance issues into the investment process in order to focus on companies that are doing better on those kinds of issues, and therefore make good long-term investments.

Glaser: Why should investors care about sustainability, though, versus just being focused on total return?

Hale: I think there is still a values-based component to it, and it's got a different character today than it might have had 10 to 20 years ago, and that is, a lot of people are very concerned about sustainability issues. If you think about how they live their lives today, in everyday life, recycling and trying to save energy and water. And certainly a lot of consumers are trying to buy more sustainable products and support businesses that they perceive as having sustainable products and practices. At the workplace, a similar situation. So, these days it's not that big of a jump from those spheres to the investment sphere. An investor might want to do it because they want to have an impact with their money by allocating their capital to companies that are better sustainability performers.

From a performance standpoint, there is a growing body of evidence that companies that perform well on sustainability issues can be very attractive long-term investments. There is a connection to the performance side there.

The idea is that you can express your interest in sustainability and support for that, try to have an impact with your money, and you should fully expect to be able to receive competitive returns.

Glaser: As this has grown in popularity, have you seen asset managers, fund companies, form more intentional socially responsible funds, ESG funds?

Hale: Yes, we did last year see new fund launches--around 20 in the U.S., which is a pretty good number these days in the fund industry for new fund launches. But in addition to that, we see a lot of asset managers, what you call conventional asset managers, basically saying, intentionality aside, we agree that it is important to incorporate ESG considerations into our investment process. So, virtually every major asset manager out there is doing that in some way, shape, or form, even if it's just to better assess the risks and to create more of a full evaluation of companies.

Glaser: Jon, thanks for sharing your thoughts on sustainability today.

Hale: My pleasure.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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