Sustainable investing continues to grow

The single biggest trend in investing over the last few years has been the movement to sustainable investing. Sustainable investing may now encompass 35% of all invested assets and may total $35 trillion dollars. (See the Global Sustainable Investing Review 2020.) This growth is astounding with $5 trillion investing in the United States over the last two years, yet it is less clear how this has impacted return behavior for individual stocks. 

There are several strategies for sustainable investing, so it is hard to disentangle return behavior in the same way as say market capitalization, value, or momentum. The global study identifies seven key sustainable strategies that range from exclusionary screening to thematic investing, yet the definitions do not provide clear guidance on how stocks can be filtered. There are no set standards.  

The two most popular are exclusionary investing and ESG integration. Exclusionary investing can be as simple as no tobacco stocks while thematic approaches may be a play on clean energy companies. 

At one third of all investing, it is now critical to have a view on sustainable investing and more importantly track the issues and decisions of sustainable investing to look for signs of crowding or price flow dynamics. Exclusionary stocks should see an increase in their risk premium and thematic stocks may see a flood of new money that will push prices above fair valuation. Sustain investing should be a core investing principle but looking for the impact on price is good fundamental investing.