Interest in sustainable investing continues to grow among individuals, driven by concerns about climate change and increased interest from younger adults and women. While the COVID-19 pandemic initially boosted focus on sustainable investing, this trend slowed in 2022 and 2023; in fact, the fourth quarter of 2023 saw the first-ever outflow from sustainable mutual funds and ETFs.¹
The first quarter of 2024 showed a modest rebound in global investor flows, according to Morningstar.¹ However, a Financial Times article dated June 5, 2024, reported a $40 billion outflow from sustainable investments in 2024 so far, based on Barclays’ data.²
Despite these short-term fluctuations in fund flows, we expect sustainable investing to remain an important consideration for many investors.
What is sustainable investing?
Defining sustainability presents a challenge, as interpretations vary among individuals. For instance, one investor might support companies producing GMO-related products, while another may prefer to exclude such companies from their portfolio. This lack of a universally agreed-upon definition poses a challenge for advisory firms seeking to provide a sustainable investing solution for their clients in a mutual fund or ETF vehicle.
The CFA Institute has an overview on its website explaining that “Sustainable investing balances traditional investing with environmental, social, and governance-related (ESG) insights to improve long-term outcomes.”3
Why are regulators and policymakers paying more attention to sustainable investments?
Sustainable investing has drawn increased attention from regulators and policymakers, particularly regarding greenwashing and measurability.
Greenwashing is the practice of misrepresenting or overstating a company’s environmental or sustainability efforts in order to appear more environmentally responsible than they actually are.
Measurability in sustainable investing refers to the ability to quantify and track the environmental, social, and governance (ESG) factors used in investment decision-making. It is crucial in sustainable investing for providing transparency, accountability, and the ability to track progress toward sustainability goals.
The Global Sustainable Investment Alliance points out that this heightened regulatory attention has led to a decline in assets labeled as “sustainable”.4 In addition, tools for evaluating companies with respect to sustainability have improved over time and increased in number, facilitating more thorough research.
What is HTG’s approach to sustainable investing?
For clients interested in sustainable investments, HTG offers to allocate a portion of their portfolio to diversified, research-based mutual funds that employ a rules-based process for identifying sustainable companies.
Dimensional Fund Advisors (DFA), a core fund provider in our portfolios, offers both US and international sustainable solutions. As environmental impact and climate change are among the top concerns of sustainable investors, DFA’s approach aims to reduce carbon footprint exposure by avoiding or underweighting the highest carbon footprint companies and emphasizing lower carbon footprint companies. Sustainability scores consider both carbon intensity and potential emissions. The process emphasizes environmental sustainability at both the portfolio and industry levels. Additional focused ESG concerns are addressed through exclusion. More information can be found on DFA’s public website.
While DFA’s process may not align exactly to every individual’s definition of sustainable investing, we believe it offers a well-conceived, thoughtful approach to incorporating sustainable investing in the portfolio construction process for interested investors.
We expect interest in sustainable investing to continue and plan to follow research developments in the evolution of rules-based strategies available to investors. Please feel free to contact us if you would like to learn more.
Footnotes:
- Morningstar, Global Sustainable Fund Flows: Q1 2024 in Review,
- Temple-West, Patrick and Schmitt, Will, Financial Times, Investors pull cash from ESG funds as performance lags, June 5, 2024.
- https://www.cfainstitute.org/en/rpc-overview/esg-investing/sustainable-investing June 5, 2024.
- Global Sustainable Investment Alliance, Global Sustainable Investment Review finds US$30 trillion invested in sustainable assets, November 29,2023.