Critics of sustainable investing are quick to the soapbox when an investment strategy that seeks to mitigate exposure to environmental, social, and governance (ESG) risks or increase exposure to positive environmental or social impacts doesn’t produce an immediate result of a cleaner, healthier planet. Some of these critics even go so far as to say that sustainable investing delays legislative action. The reality is sustainable investing alone is not going to save the planet in the same way that the planet won’t be saved by one piece of legislation. While asset managers may take different approaches to sustainability, and it is their responsibility to define that approach, the point that critics are missing is that sustainable investing is not meant to be the whole pie – it’s just one slice.
To mitigate the impacts of the climate crisis, for example, trillions of dollars will have to be spent on adaptive technologies and resilient infrastructure. This will require the public and private markets to allocate capital to companies working on these solutions. At the same time, government agencies will also have to act – not only by deploying revenue to those same solutions, but also by restricting public spending that perpetuates the problem and using the policy tools at their disposal to incentivize or require the private sector to act.
While some U.S. policymakers have pushed for a shift to a low carbon economy, unfortunately the political divide has resulted in minimal progress. This lack of government action is not a result of the existence of sustainable investing. The option for investors to deploy their capital in sustainable products and securities does not negate Congress’s legislative authority; nor does it absolve elected officials of their responsibilities.
Although critics may be missing the point, many companies understand investors’ ESG-related concerns and, as a result, are moving towards more sustainable business models, seeing the opportunity to save costs and capitalize on consumer trends. Companies have also increasingly recognized the risks posed to their operations and by the externalities that they impose on society and the environment. And we anticipate that this trend will grow.
In order to move towards a sustainable economy there will need to be swift action not only by investors and capital markets, but by legislators, policymakers, and private companies around the world. That’s a tall order…but an essential one.
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ESG and impact focused strategies are identified with the support of third-party research. Certain asset classes may not have an ESG or impact focused strategy that goes through our ESG due diligence standards. In this case, the portfolios will generally utilize alternative strategies that have been vetted by the PMC Research Team. Funds that incorporate ESG characteristics into the investment process may limit their exposure to certain types of investments. As a result, an investment in an ESG focused fund may be less diversified relative to funds with similar strategies that do not have an ESG focus.
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Carlee Griffeth is an ESG Data and Research Analyst for Envestnet | PMC’s Sustainable Investing Team. Her work is focused on ESG and thematic impact due diligence. She is also responsible for sourcing and analyzing ESG data to support the development of sustainable products and reporting tools for advisors. Prior to Envestnet, Carlee served in the federal government for eight years, including the White House and both chambers of Congress. She earned her Master’s Degree in Urban Planning at Harvard University, where she focused her studies on sustainable development and decarbonized infrastructure.