In the past few years, investments that incorporate environmental, social and governance factors, known popularly as "ESG investments," have quickly gone from fringe status to a dominant opportunity.
According to a new report from nonprofit foundation US SIF, there were $17.1 trillion in sustainably invested assets in the U.S. alone at the start of 2020. That's up from $12 trillion just two years prior, making for a 42 percent increase. In fact, ESG now accounts for a third of all professionally managed assets in the country.
And while teaching the next generation about climate change and how to live more sustainably has been the predominant focus of sustainable investing so far, attention has begun to shift to social causes.
“ESG has largely been focused on the 'E,' and the 'S' was almost the forgotten middle letter," said Kent McClanahan, vice president of responsible investing at RBC Wealth Management-U.S. “But 2020 was the year that really put the spotlight on social justice."
For companies and investors alike, ignoring social justice factors can represent a very real risk. A destabilized society—whether it's the mistreatment of workers, a lack of diversity and inclusion or poor community relations–is simply bad for business, especially when companies can strategize to advance social causes.
And while corporate America has traditionally been reluctant to wade into social and political issues, they proved impossible to ignore in the aftermath of 2020.
Witness the content of earnings calls for S&P 500 companies: At the beginning of the year, under 10 percent of firms had mentions of diversity and inclusion, said McClanahan. After the year's second quarter, that spiked to 40 percent.
“It shows companies started thinking about it a lot," he said. “It became the focus of the whole year."
But companies are not the only ones focusing on social justice themes. With women changing philanthropy and younger generations starting to control more assets, there's been a marked shift towards investing sustainably, rather than a focus solely on returns at all cost.
One trending question investors are asking their advisors: How can I make sure these principles of social justice are accurately reflected in my portfolios?
“There are several different resources for investors," said Kevin McDevitt, senior VP and director of Global Manager Research at RBC Wealth Management-U.S. “For those who want to keep it simple, they may want to consider pre-constructed ESG portfolios. For investors looking for more choice, there are a number of ESG mutual funds or ETFs for them to consider as they construct their own portfolio. For those who want to take it to the next level, they can get even more customized by using managed accounts to align underlying investments with their values as much as possible."
In the past, that kind of hyper-customization has been a challenge. After all, a broad concept like "social justice" is harder to quantify than, say, profit or loss figures on an earnings report.
But as company reporting on this trend gets better, and data providers continue to innovate, a social justice-oriented portfolio has now become possible.
Morningstar's annual analysis of ESG-screened indexes has found that 75 percent outperformed their broad market equivalents in 2020, and 88 percent outperformed for the five years through the end of 2020.
That might sound surprising at first, but it stands to reason. If a firm is able to minimize such social justice "risks"–if it has harmonious relations with its workers, boasts a diverse and thriving C-suite and is seen positively by the community—then it should enjoy some downside protection, no matter what world crisis comes its way.
The year 2020 taught us those social crises will come and, perhaps, all at once. But by acknowledging those risks, taking productive action and reflecting the values of a growing number of investors, forward-thinking companies should be able to survive and thrive in a rapidly changing world—and provide returns to shareholders at the same time, said McClanahan.
“A lot of companies have made commitments to issues like leadership diversity and are now following through on it. Social justice will continue to be a big part of the conversation going forward," McClanahan explained.
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This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change.
This article is a republication of content originally published by RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. © 2020, Royal Bank of Canada, used with permission. This article may not be reproduced, distributed or further published by any person without the written consent of RBC Wealth Management. Please cite source when quoting.