Many businesses lately have taken to marketing their products as “sustainable,” “green,” environmentally-friendly or a host of other descriptors. This reflects the larger trend toward a more well-informed and world-conscious consumer base, made up of many people who value these characteristics. Sustainability is an all-encompassing concept that generally means putting long-term value over short-term gains. Many see this as vital to the continuation of nature and the world as we know it, but it’s also not a bad investment strategy, either.
“Every investment has a utilitarian component as well as an expressive and emotional one.”
Behavioral science analyst Stephen Wendel of Morningstar wrote on the reasoning behind sustainability-focused investment strategies, and why they might be the perfect fit for a broad class of savers. Citing research from economist Meir Statman, Wendel noted that the informed financier looks for more than just risk and return when selecting a new home for capital. Ultimately, investing provides returns that are utilitarian, expressive and emotional. Wendel argued that an investment approach that focuses on sustainability could potentially satisfy all three of these perfectly.
In terms of utility, it doesn’t get much better than seeking out investment opportunities that emphasize long-term growth. However, it can be difficult to nail down a specific definition of “sustainable.” As Forbes contributor Kevin Mann wrote in a recent column, sustainable investment can also include what’s known as socially responsible investing. This can include a huge variety of different types of businesses, but the term does not exclude environmentally sustainable investment. In fact, this may be the best angle to attack the issue from.
For example, Wendel found that sustainable index funds tended to perform better over time than non-sustainable ones, although the difference was slight. Another study from SDP also found a positive correlation between a corporation’s acknowledgement of climate change and business performance. However, sustainable stocks don’t always outperform their “non-sustainable” competitors, and there’s no solid evidence that they will always provide the better return. Still, there’s a case to be made for good returns on sustainable investment.
Expressive and emotional
For those with the means to approach investment as a form of self-expression, there are few better ways to do so. Millions of investors pride themselves on their ability to make a difference for sustainable businesses. But these world-conscious backers aren’t the only ones making a statement with their money. As Wendel pointed out, every investment is one driven by emotion and taking the form of expression. Some identify as “value investors,” meaning they put extra weight in stocks or bonds that provide a high return for a low price. This is no more an identity than one as a sustainable investor, and no less effective.
This underscores the extreme importance of a financial advisor’s duty to their client. By understanding their needs as well as their desire for expression and fulfillment through their investment, they can form an immensely strong relationship. That may mean understanding that the value in an investment isn’t always equivalent to just dollars and percents.