Thursday, April 18, 2024

Responsible investing insights


Responsible investing is on the rise, providing investors with opportunities to align portfolios with personal values.

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In today’s world, the factors driving the consideration and adoption of responsible investing are countless. During the past year alone, the economic and social effects of COVID-19, the racial justice movement, and climate change contributed to a notable acceleration in the interest and implementation of responsible investing, say PNC investment strategists. Add to that gender and generational shifts in asset ownership and investment priorities – with women investors taking a more prominent role in investment decision-making and millennials poised to inherit trillions during the great wealth transfer – and the conditions are ripe for a continued rise in responsible investing.

Just as numerous as the factors contributing to the growth of the responsible investing space are the terms associated with it. Socially responsible, sustainable, socially conscious, green and ethical are just a few descriptors often ascribed to investment decisions that align with investors’ personal beliefs. To simplify, PNC has embraced the term responsible investing, or RI – meaning a goals-based investment strategy that proactively supports an investor’s values, excludes portfolio exposures that may conflict with those views, and/or allocates capital toward a targeted impact.

“We view RI not as a distinct investment philosophy or asset class but as an implementation strategy,” says Nick Ashburn, head of Responsible Investing for PNC’s Asset Management Group. “It’s a lens, or filter, we can use to implement a portfolio that aligns with an investor’s goals, intentions, values or missions.”

Ashburn is quick to point out that RI requires a keen understanding of values, coupled with portfolio knowledge and the ability to look beyond traditional portfolio construction. Additionally, not every issue or concern is always best addressed within an investment portfolio, but some may be. To that end, RI can be implemented in a variety of ways at the asset class, manager and security selection levels. And it’s possible for people to invest according to their principles at just about any allocation level, given how the suite of investment solutions has grown and evolved over time.From directing IRA contributions to mutual funds that specialize in RI to supporting women-owned startups as an angel investor, the options and flexibility to customize portfolios to investors’ unique values have never been more robust.

There was a time not so long ago when the premise of responsible investing was widely viewed as an either-or proposition; the notion that an investor could introduce non-financial factors into the investment process – without negatively impacting financial performance – was novel and easily dismissed. In recent years, however, research findings from top business schools have challenged that assumption, demonstrating that these investment strategies do not inherently require tradeoffs, says Ashburn. Meanwhile, examples of individual and institutional investors achieving both financial and values-aligned goals abound. North Carolina State University made national headlines in 2018 when its “socially responsible” fund outperformed its main portfolio.

“The dialogue has increasingly moved away from how RI might affect financial performance and is gravitating toward how investors can optimize a portfolio to achieve both long-term financial and values-based goals,” says Ashburn. “At the same time, investors should understand that
implementing RI in portfolios won’t necessarily or consistently outperform or underperform across all market environments, just as there is no guarantee any traditional investment strategy should – or even could – produce the same results.”

The key to successfully implementing RI in a portfolio, says Ashburn, is for investors to begin with a clear understanding of the areas that interest them most. “The array of investment options has evolved significantly over the past decade, so it’s important to identify and articulate RI goals early on,” he says.

For asset owners looking to incorporate RI more intentionally in the management of their portfolios, Ashburn outlines the following basic methods for consideration.

Early adopters of RI primarily focused their efforts on exclusion – screening companies for qualities that didn’t align with their values. Screening applications, or overlays, are still commonly implemented in RI, informed by criteria reflective of the investor’s concerns and values. Negative screens apply a set of predefined criteria that might be counter to or misaligned with an investor’s mission or values. Negative screens might include ethically questionable industry classifications, such as alcohol, tobacco and firearms – or corporate practices, such as poor labor standards and human rights violations. Positive screens might look to increase specific RI exposures in a portfolio, such as renewable energy generation, sustainable land use practices, or companies that support diversity, equity and inclusion.

Another popular measure is the integration of ESG metrics. Environmental criteria look at how a company performs as a steward of the natural environment. Meanwhile, social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities in which it operates. Finally, governance addresses a company’s leadership, executive pay, audits and internal controls, and shareholder rights.

At one time, ESG analysis was considered a standalone investment process. Today, says Ashburn, there is much wider adoption and greater systematic integration of ESG issues and factors within the framework of comprehensive investment strategies.

The past decade has seen a rise in shareholder activism, due in large part to the passage of the Dodd-Frank Act, which requires companies to disclose executive compensation. So it should come as no surprise that corporate governance matters, including senior executive pay package or board diversity resolutions, have been the focus of the majority of proxy issues. Detailed disclosures on political spending and lobbying also have been points of interest, while other popular proxy items include various environmental and social issues.

In addition to proactively investing in companies that support RI best practices and voting proxies along ESG guidelines, some investors are interested in contributing more directly to solutions for social and environmental challenges through impact investments. Generally implemented through private investments (e.g., private equity and private credit), investors can pursue their impact objectives by supporting companies with innovative technologies that combat climate change or seek to improve learning outcomes with education technology.
Impact investments also can provide opportunities to support entrepreneurs of color or access to financial services and affordable housing.

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