The ABCs of ESG

Do you recycle?

Do you support local businesses?

Do you volunteer in your community?

Do you donate to worthy causes?

If you answered “yes” to any of these, you are making sustainable choices consistent with your values. And so sustainable investing may be for you.

This blog is about Clayton Wealth Partners’ approach to sustainable investing.

What Is Sustainable Investing?

Sustainable investing can mean different things to different people. Adding to the confusion is the list of terms often used interchangeably, including ESG investing, impact investing, and socially responsible investing (SRI).

At Clayton Wealth Partners, our definition of sustainable investing is an investment strategy that meets the following four criteria:

  • Allows investors to put their money to work consistent with their values
  • Aims to provide better outcomes for society
  • Includes a focus on environmental, social, and governance (ESG) factors
  • Complements traditional investment analysis and objectives

Sustainable investing has a broad, multifaceted mandate. It goes beyond merely avoiding investments with meaningful exposure to industries that may be deemed harmful to society, like alcohol, firearms, fossil fuel production, gambling, and tobacco. It also looks to emphasize or enhance exposure to elements with a positive societal impact. All of this is done through a focus on various ESG factors.

What Are ESG Factors?

ESG factors are criteria that investors focused on sustainability consider when evaluating potential investments. These factors include a company’s actions, beliefs, and policies toward various environmental, social, and corporate governance issues.

Exhibit 1 shows an incomplete list of various ESG factors and issues.

Exhibit 1: ESG Factors and Issues

Source: Clayton Wealth Partners (CWP).

The more favorable a company’s approach to these factors in terms of benefits to society, the more sustainable the company is considered.

Note that ESG investing considers the well-being of several important constituents beyond shareholders or other investment owners. These include the planet, global citizens (including support of racial and gender diversity), the users of a company’s products or services, and a company’s workers. Some consider sustainable investing “capitalism with a purpose.”

Sustainable Investing Is Growing in Popularity

We’ve seen an increase in recent years in the interest and employment of values-based investing. Exhibit 2 highlights the growth in interest among nonprofessional individual investors in sustainable investing by age. Interest is greatest among younger investors, which may be of little surprise. But a bit more surprising is that now more than half of all older adult retail investors are interested in ESG strategies.

Exhibit 2: Retail Investors Interested in Sustainable Strategies, by Age

Source: CFA Institute, CWP.

And investors are acting on their interests. Exhibit 3 shows the growth among retail investors that are employing sustainable investing strategies, again by age.

Exhibit 3: Retail Investors Currently Employing Sustainable Strategies, by Age

Source: CFA Institute, CWP.

This strong growth in the pursuit of values-based investing is showing up in other data. Exhibit 4 depicts the increase in sustainable assets under management. To be sure, some of the growth can be attributable to strong gains in the stock market overall over the past few years. But Exhibit 4 also shows the parabolic rise in net flows, or net cash that investors put into ESG strategies.

Exhibit 4: Sustainable Funds Annual Assets and Flows

Source: Morningstar, CWP.

We think this growth is more than just a fad. Long-term drivers include powerful demographic trends, government policies favorable to the ESG environment, and the recognition of increasing ESG risks and their potential financial impact on investment companies. With the rise in demand for sustainable investing, we want to make sure our clients can match their investment strategy with their values.

If You’re Interested in Sustainable Investing, We Can Help

We at Clayton Wealth Partners are excited to announce that we now offer CWP Sustainable Portfolios. For us, it’s about offering our clients the choice of putting their investment dollars to work in a manner consistent with their values.

If you’re interested in learning more about CWP Sustainable Portfolios, feel free to call our Topeka or Lawrence offices to learn more about how we can help.

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James Walden, CFA

As a partner and the firm’s Chief Investment Officer, James Walden strives to maximize our clients’ long-term, risk-adjusted portfolio returns. This includes determining strategic and tactical asset allocations, as well as specific investment analysis and prudent rebalancing. Jim is also a partner and management team member. His expertise includes advanced investment research and valuation, and he is passionate about his role in helping clients reach and exceed their financial goals.