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Sustainable Investments Podcast
March 26, 2019

Conversations with Commerce Trust

Sustainable Investing: Doing Well By ‘Doing Good’


Listen as Commerce Trust Company’s Director of Investment Research Barbara Turley discusses sustainable investments and how investors are including these impact investments in their portfolio successfully without sacrificing returns. 

Sustainable Investments Podcast
Non-depository investments offered through Commerce Bank are not guaranteed, are not FDIC insured, and may lose value.  Investing involves risk and the information provided here as well as the past performance of any investment obtained through Commerce Trust Company is no guarantee of future results.  information provided is for general education, information, or illustration purposes only, may be of value, but is not and should not be viewed or treated as a recommendation on any future investment or market action.  You are responsible for any investment transaction you choose to enter into, and understand that the following information from Commerce is not to be relied upon as a basis for any future investment decision.  This disclosure statement cannot disclose all risks of investments, economies or markets in which you may choose to transact.  Therefore, please consult with your individual investment advisor for specific investment advice and recommendations.  Commerce does not offer tax, legal or specific estate planning advice.
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Below is a transcript of the episode, edited for readability. A downloadable copy is available at the bottom of the page. 

Chris Schildz: Hello. I am Chris Schildz with the Commerce Trust Company, and today we have another episode of Conversations with Commerce Trust where we share investment trends and information to help our clients reach their investment goals.

Today's topic is one you won't often hear discussed at length on local investment call-in programs. We're going to talk about how today's socially conscious investors can make investments that meet criteria for sustainable business practices. These investors are interested in supporting causes. They can bring about positive societal contributions, and without sacrificing on investment return.

I am here today with Barbara Turley Commerce Trust Company's Director of Investment Research and a chartered financial analyst who has just authored a commentary that will be of interest to this growing investor segment.

Barbara, sustainable investing might be an unfamiliar term to many investors. Over the years they may have heard it referred to as socially responsible investing, impact investing, green investing, and even ethical investing. We're told that the percentage of socially responsible, or sustainable investing now represents one quarter or 25% of all professionally managed assets. It's too big to ignore.

First of all tell us what constitutes a sustainable investment, and why is it important to potential investors.

Barbara Turley: Sure. Sustainable investing is an approach in which environmental, social, and governance factors are incorporated in the investment strategy. So, environmental, social, and governance that's were we get the acronym ESG.

Environmental factors may be the most familiar to investors. They include traditional environmental concerns around carbon emissions, pollution, natural resource usage, energy efficiency, and the like. Social factors may include human rights, product safety, workforce rights and safety, equal opportunity, but also privacy and data security. Governance factors might cover the corporate board of directors, and whether it is independent, and whether it's diverse, shareholder rights, ethics policy, ethics violations. So, these are some of the major ESG factors that measure a company's record on corporate citizenship, and they may be incorporated into an ESG investment strategy.

Now, there are also what's called impact investments. These investments typically seek to make a positive environmental or social change, and impact investments tend to have a very narrow focus on a particular environmental or social goal.

Chris Schildz: Now, that certainly covers a big water front, and we know that the roots of ESG investing extend back to the early 1970s.

Barbara can you give us a little context on this evolution from the avoidance of so called sin stocks to where we are today?

Barbara Turley: Well, you're right. Socially responsible investing dates back maybe 50 years or more. Socially responsible investing involves excluding companies operating in certain industries like gambling, alcohol, tobacco, weapons; that sort of thing. Or maybeexcludes certain industries based on religious values. So, it's an exclusionary approach that just avoids industries.

Now, in contrast an ESG approach is inclusionary. So, it seeks to include companies of all industries based on their ESG rating, or the record of the company's corporate citizenship.

Chris Schildz: Barbara let's talk about the mechanics of ESG for just a second. Can you describe how environmental, social, and governance investments really work?

Barbara Turley: Sure. So, ESG mutual funds, and exchange-traded funds are invested in liquid securities, stocks and/or bonds. So, ESG factors might be incorporated into an existing investment framework that also considers traditional investment measures for selecting the stocks and/or bonds.

So, for example factors like return on assets, return on equity, earnings growth, stock valuation, the company's business model, industry competitiveness, management quality ESG factors would be weighed along with these traditional measures. And the idea is that good corporate citizens may be more successful as they may be better managed, they may not be vulnerable to major ESG disasters, and might be less burdened by regulation, and other constraints. And all else equal a good corporate citizen would be preferred over other companies.

So, this is the most common way to employ ESG factors in an investment strategy alongside traditional investment factors. But there are also ESG strategies that we would call pure plays. In a pure play strategy ESG factors might represent the sole criteria for selecting securities, and not just considered alongside a host of other factors.

Now, at the beginning of 2018 there were more than 200 pure play mutual funds, and ETFs in the ESG investment world.

Impact of investments are a bit different. They often are in the form of private funds, and they might have a focus, let's say, on carbon recapture, or renewable energy, or low-income community development among other goals.

Chris Schildz: Clearly ESG would be appealing to highly motivated investors. But are investors realistic in thinking they can invest with theirhearts without sacrificing on returns?

Barbara Turley: That's a good question. There have been numerous studies conducted on the effects of ESG factors and sustainable investing approaches on investor returns, and many of these studies have suggested that ESG investing does not necessarily require the investor to sacrifice returns over the long-term. In fact a number of studies have shown favorable results for ESG investors versus traditional approaches.

Now, there have been concerns that exclusionary socially responsible investing approaches can result in a portfolio that is not properly diversified if the exclusions list is too restrictive. And these approaches may be associated with a performance penalty.

As it relates to impact investing ... Impact investing is viewed as potentially earning a market return, but investors in impact investments may need to be prepared for a return that is below the return of the market. Now, impact investors tend to be more focused on the social or environmental purpose of the investment than the return so this may be acceptable to them.

Of course, there are no guarantees with sustainable investments just as there are no guarantees with virtually any investment.

Chris Schildz: Are ESG investments more of a development confined to the United States, or does this trend extend worldwide?

Barbara Turley: Well, actually, Chris, Europe has embraced ESG investing at a faster pace than the US has. According to the Global Sustainable Investment Alliance, in 2016 global sustainable or socially responsible assets totaled nearly 23 trillion. That's trillion with a T-R. And of that Europe represented about 12 trillion while the US represented just under nine trillion.

Chris Schildz: What can investors, not currently involved in ESG investments, do if they're interested in exploring these opportunities?

Barbara Turley: Well, we would welcome the opportunity to sit down with any investor interested in ESG investments to help them explore theareas that they would like to support or avoid.

ESG investing is typically a very personal endeavor, and we can build ESG portfolios that are customized to each investors vision. Of course, any sustainable investment should be part of a long-term strategic asset allocation plan, and your Commerce portfolio manager will play an integral role in helping you determine a prudent allocation suitable for you, and help you build a portfolio that's diversified to help you meet your goals.

Chris Schildz: Thank you Barbara, and thanks for our listeners in joining us today. Remember if you'd like to discuss anything related to this podcast you're welcome to call either Barbara at 314-746-8726, or to touch base with your personal Commerce portfolio manager.

Disclosure:
The risk of loss in securities in other investments can be substantial. You should always carefully consider whether investments either entered into directly by you, or through Commerce Trust, or any financial institution on a discretionary managed basis is appropriate for you in light of your investment objectives, financial circumstances, tax status, your tolerance to risks, and your investment experience. In considering whether to trade or invest you should inform yourself, and be aware of the risks generally.

Non-depository investments offered in connection with Commerce Bank are not guaranteed, are not FDIC insured, and, as noted earlier, may lose value.

Any information provided is for the purpose of general education, information, or illustration only, and is not to be treated as the opinion of Commerce Trust Company, or Commerce Bank as a recommendation on any future investments or market behavior.

Providing this information, which may be of value to you or others in the general audience, shall not detract from an investors responsibilities to take all such steps, and make all such inquiries as may be necessary or desirable to ensure that you fully understand, and are familiar with any potential future investment.

Neither Commerce nor any of its officers, employees, or agents have made any recommendation or given any advice as to the terms and profitability of any investment or market activity, which may be referenced here.

Accordingly, you understand that you are, and shall at all times be fully responsible for any investment transaction you choose to enter into, and that you shall not have relied on any of the following information from Commerce as a basis for an investment decision. Please also note that Commerce does not offer tax, legal, or specific estate planning advice, and while we may provide information or express general opinions from time to time such information or opinions are not offered as professional tax or legal advice.

If you are in any doubt about the risk involved in any trading or investment arrangements, or you are uncertain of, or have not understood any aspect of the risk disclosure statement you should seek independent professional advice.

Markets economic forecast in specific investments can change from time to time based on a variety of individual, interrelated, or complex factors of varying degree.

This disclosure statement cannot, of course, disclose all the risks and other significant aspects of investments, economies, or markets in which you may elect to transact from time to time. You should, therefore, carefully study relevant investment arrangements in advance of making decisions regarding investing.


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