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Sustainable Investing

New Year's Resolutions for Sustainable Investing

We set some goals for individuals, defined-contribution-plan participants, advisors, asset managers, companies, and regulators.

Individual Investors: Make Your First Sustainable Investment in 2020 Chances are, you are already interested in sustainable investing. You want your investments to consider how the environmental, social, and governance challenges facing public companies today may affect their stock value. You want your investments to guard against climate risk and perhaps to go even further by helping finance positive solutions to the climate crisis. You want your investments to encourage corporations to create value for all stakeholders and society at large. In short, you want your investments to have a positive environmental and social impact in addition to risk-adjusted financial returns that help you meet your own long-term goals.

You are not alone. According to a Morgan Stanley survey released this year, 85% of investors say they are interested in sustainable investing. Most of them (49%) say they are "very interested" while 36% say they are "somewhat interested." Natixis and Nuveen reported similar results earlier in the year.

But many of you have yet to make a sustainable investment. In making your first one, you certainly won't be alone. Asset flows into sustainable funds in the United States have set records in each of the past four calendar years, with flows in 2019 already more than 3 times higher than those of 2018. And institutional investors the world over have been moving money into sustainable investments.

How to do it? Several financial technology companies offer sustainable investing solutions. You can build a personalized sustainable portfolio through OpenInvest or select from ready-made sustainable portfolios offered by Newday Impact and Motif. Your investment will not be in a fund but will consist of fractional shares of companies packaged together for you.

Or if you want to invest in a tried-and-true open-end or exchange-traded mutual fund, go for a broad-based stock fund as your first move. Check out Calvert US Large-Cap Core Responsible Index CISIX. The fund has an excellent performance record, and Calvert Research and Management has been a leader in sustainable investing for years, including extensive engagements with the companies it holds around ESG concerns and a strong proxy voting record on those issues. The fund is available without a sales charge or transaction fee on fund supermarket platforms.

For more fund suggestions and allocation models to use in building out your overall portfolio, take a look at the ESG model portfolios put together by my colleague Christine Benz. For retirement savers, see Benz's ESG Mutual Fund or ESG ETF portfolios. For retirees, see her ESG Mutual Fund or ESG ETF Bucket portfolios.

Defined-Contribution-Plan Participants: Ask HR to Add Sustainable Investment Options Chances are, your 401(k) plan lacks sustainable investment options. Only about one in 10 plans have one in their lineup. So here's what to do in 2020: Contact your human resources department and make the simple request to add sustainable investment options.

Your request will be more impactful if you can get like-minded colleagues to sign on. You might also forward this Natixis report that outlines the reasons why adding ESG options can boost the retirement security of plan participants.

Just asking may not produce immediate results because the process of changing a plan's investment options can be a lengthy one, but you may be surprised about how easy it can be to get the ball rolling. Many companies today are in stiff competition for talent and want to provide benefits that are highly valued by current and prospective employees, so chances are, your request will be carefully considered.

Financial Advisors: Start Asking Your Clients About Sustainable Investing If you are a financial advisor interested in sustainable investing, make 2020 the year that you start asking every client about it.

More and more, financial advisors are getting up to speed on sustainable investing, yet most are still waiting for clients to bring up the topic. Given high levels of investor interest, it's safe to assume that many of your clients want to know more about sustainable investing even if they don't bring it up.

Advisors who are already doing this tell me that asking clients about sustainability issues is one of the best decisions they've ever made. Doing so opens up fruitful conversations that give advisors a better sense of what's important to their clients, allowing them to forge a deeper bond. By helping clients invest in ways that are relevant to them and that address significant issues like climate change, you're helping them develop an identity as an investor and a way to relate to their investments beyond just quarterly returns. Such a connection can also help make your clients better investors and more likely to focus on the long run and to stay the course when markets decline (and to stick with their advisor).

Asset Managers: Be More Transparent Most asset managers today have some kind of sustainable investing or ESG initiative underway. But it often isn't clear exactly what that entails. Your resolution for 2020 is to be more transparent about your approach.

If you are one of the many asset managers claiming that you now consider ESG in your investment process, for example, tell us more about how ESG affects actual investment decisions at the strategy level. If you offer passive ESG funds, tell us more about why some companies don't make it into the index and others do.

If you engage with companies about ESG issues, tell us more about those meetings and their takeaways. Tell us why you voted your proxies the way you did on ESG-related issues. Why wait until the end of August to make your votes public? That's when your proxy voting report is due to the SEC, but there is no reason why you can't announce votes as they happen. Or even in advance of when they happen.

Companies: Embrace Sustainable Investors as Allies in Your Long-Term Success If you are leading a company that sees your mission as the pursuit of long-term value for all your stakeholders, 2020 should be the year in which you embrace sustainable investing as an ally in that endeavor.

As I wrote recently elsewhere:

"While sustainable investment strategies vary in their particular investment approaches, at some level most of them are trying to identify companies that are pursuing stakeholder value, avoid those that aren't, and engage with the ones they own as shareholders to urge them in that direction. In so doing they are not only aligned with the new stakeholder-value paradigm, they are helping bring it into being.

"Over the long run, corporations are more likely to adopt this worldview if they know they have a base of support for it among their investors who believe that long-term sustainable value for shareholders and society results from corporations being managed from a stakeholder perspective."

How to do it? Embrace shareholder engagement requests as opportunities for improving your business and insight into how your firm is perceived by sustainable investors. Pay attention to material ESG issues that sustainable investors have identified and be willing to disclose pertinent information about these issues to investors. Add sustainable 401(k) options to your retirement plan. Oppose regulatory efforts to limit shareholders' ability to propose and resubmit resolutions. Reconsider your financial support of Washington, D.C.-based trade organizations that are behind these efforts. More broadly, support public policies that address sustainability challenges the world faces today.

Regulators and Policymakers: Stop Limiting Shareholder Rights and Start Providing Sustainable Investors With the Information They Need As I've discussed before, a partisan SEC is trying to make it more difficult to propose and resubmit shareholder proposals and to change the proxy voting process by making it harder for proxy advisory firms to help asset managers cast their votes.

The SEC's resolution for 2020 should be to stand down on these efforts, and recognize the value of shareholder proposals in raising issues and helping companies address them before they suffer the financial consequences of ignoring them.

For policymakers in general, your resolution should be to make clear that the consideration of sustainability issues in an investment process is securely within the scope of fiduciary responsibility. Once that happens, you should help sustainable investors get the decision-useful information they need through required standardized disclosure on material ESG issues, using the already worked-out SASB standards as a guide.

Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.

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