A long-term commitment to sustainability can help investors weather short-term market turbulence

How to react to market volatility? This is a pertinent question for any investor given that the stock market hit corrective territory this week just before Russia invaded Ukraine. For long-term investors with a diversified portfolio, the best bet is to stay the course rather than reduce or liquidate your equity exposure in reaction to events like this week’s.

But if you’re a sustainable investor, you may have additional concerns. Many of you are among those who have poured billions into environmental, social and governance equity funds over the past few years in ESG-friendly markets. Not only have markets fallen in the first two months of 2022, but many sustainable equity funds have lagged behind their peers. Expensive growth stocks that tend to be overrepresented in many ESG equity portfolios were hurt by the correction, and value stocks, including fossil fuel-based energy stocks, dominated the market.

If you have a strong ESG-driven growth trend in your portfolio and your year-to-date returns are causing you too much discomfort, this is an indicator that you may need more balance. style in your long-term portfolio. You can do this by adding valuable funds to your portfolio.

Beware though: markets have already moved a lot, so reducing growth exposure for now risks missing out on a rebound in growth stocks. But adding value gradually to better balance your style exposure over the long term can help you rest easier during future bouts of volatility.

A Word About Sustainable Value Funds

While it’s harder to find sustainability leaders on the value side of the spectrum, it’s far from impossible. There are 15 sustainable funds in the Morningstar High Value category, including Calvert US Large Cap Value Responsible Index (CLVRX)Nuveen ESG Large Cap Value ETF (NULV)and actively managed Parnassus Endeavor (PARWX). Compared to value funds in general, ESG value funds have less exposure to traditional energy and utility stocks. They tend to offset these underweights with overweights in financials, industrials and defensive consumer stocks.

It’s true that growth stocks tend to have better ESG credentials than value stocks. But ESG value funds can help companies improve their sustainability profile through active ownership.

And another on active property

Indeed, one of the great untold and still unfolding stories of sustainable investing is the impact achieved through active ownership. As shareholders, sustainable investors can engage with companies on ESG issues, they can sponsor shareholder resolutions formally asking companies to address ESG issues, and they can vote proxies in favor of those resolutions or register their disagreements by voting against board nominees or executive compensation. packages.

i call it a big one indescribable story because I don’t think investors know much about the active ownership activities undertaken by many sustainable funds. This is partly because, until recently, most direct engagement with companies was undisclosed and the vast majority of votes on shareholder resolutions received very little support.

And I call it a ongoing because the growth in sustainable fund assets has been accompanied by much more active ownership activity, more shareholder resolutions and, most importantly, much more support for shareholder resolutions related to ESG by investors of all types.

To find out more about these activities, see the “2022 Proxy Resolutions & Voting Guide”, published by the Interfaith Center on Corporate Responsibilityan organization that has been around for five decades and whose members include institutional investors and asset managers who now represent more than $4 trillion in assets under management.

ICCR members submitted a record 436 proposals (and counting) this year. Almost half of these resolutions deal with the climate crisis; racial justice; and diversity, equity and inclusion. Other notable topics include calls for greater disclosure of corporate political activities, which stem from companies saying they would stop contributing to politicians who supported the Jan. 6, 2021, Capitol uprising, then quietly resume. their donations, and from companies that claim to be committed to climate action but contribute to professional organizations that are not. Tech companies are under intense scrutiny over proposals related to the use of surveillance technology, data privacy and the spread of misinformation.

Active ownership is what really sets many sustainable funds apart from more conventional funds. These activities have a clear impact on public companies as they meet the demands of a large and growing segment of their investor base to address the material ESG issues they face and to incorporate sustainability concerns into their models. commercial. If you own a sustainable fund, it should publish a report on its active ownership activities.

Not only does active ownership have a broad impact, but it is also an activity that can and should help sustainable investors forge a deeper connection to their investments. And that, in turn, can help sustainable investors focus on the long term and maintain their investments during periods of market volatility.

And a final word on commitment

Look at it this way: all investors invest to receive the risk-adjusted return they need to achieve their overall financial goals. In doing so, they obtain what is known in the world of behavioral finance as a utility benefit that results from their purchase of an investment product.

But beyond the purely utilitarian benefit of investment returns, sustainable investors can also receive emotional and expressive benefits from their investments. The decision to invest in a way that reflects their values ​​and makes a difference is literally an expression of who they are and how they see themselves in the world. This is what behaviorists call expressive benefit. And the decision to invest sustainably makes investors feel good about themselves and their decisions, giving them an emotional edge.

Our esteemed colleague Don Phillips wrote about this recently in “A Better Case for ESG”: “When a portfolio becomes a cause, investors are likely to focus more on it…People want to believe they are doing part of something bigger, that their actions have meaning for the world around them. ESG themed funds have the potential to forge such bonds.

With a deeper commitment to their portfolios, he continues, sustainable investors are more likely to “stay the course when others are abandoning ship.” And if so, sustainable investing “will deliver valuable social good by helping to improve the long-term finances of a new generation of investors by not forcing a divide between their financial and social or environmental goals.” .