A Guide to Sustainable InvestingIt’s more than just following your conscience. Here are some tips and pitfalls.What are you actually getting when you put your money into a sustainable investment? And how do you know the mutual fund or ETF with the “sustainable” label fulfills its promise?

Investments marketed as sustainable—meaning they focus on companies that incorporate environmental and social corporate-governance practices into long-term corporate strategies—are experiencing explosive growth. Wall Street has jumped in with sustainable-investing divisions that create products for key demographics, like millennial, who are eager to align their values with their investments.

As of July 2015, assets invested in stock exchange-traded funds tracking MSCI Environmental, Social and Governance (ESG) indexes had grown nearly 30% to $1.8 billion since the start of theyear. Since December 2013, assets have more than doubled, with 22 new ESG ETFs tracking MSCI indexes.

In addition, MSCI has seen a huge increase in ESG indexes to more than 150 today, up from 25 in 2010.

But the investing style isn’t always easy to practice, especially for an individual investor choosing what fund to buy on his or her own. Some claims and promises are too good to be true. And even people within the sustainable business can’t agree on what is sustainable and what isn’t.

Matter of interpretation

The main issue is the lack of uniform information for both individual and institutional investors, meaning interpretation of the word “sustainable” varies depending on who is using it. That can cloud investor decisions when it comes time to dedicate money to a specific fund.

Jean Rogers, chief executive and founder of the nonprofit Sustainability Accounting Standards Board, is trying to develop uniform standards for about 80 industries across 10 sectors.

She says the current pool of data around sustainability relies too much on voluntary corporate disclosures, such as annual sustainability reports and company questionnaires put together by institutional investors—many of which ask different questions.

“Individual investors are quite challenged to obtain this type of information in a way that is easily available and informs investment decisions—either specific stock selections or products tomanage or fund your 401(k),” says Ms. Rogers. “We need better investible products,” she adds. Ms. Rogers’s board includes former New York City Mayor Michael Bloomberg and former Securities and Exchange Commission Chairwoman Mary Schapiro.

There are several popular funds available for investors who want to leave all the decisions to experts. One is Pax World Global Environmental Markets Fund (PGRNX). David Richardson, managing director at Impax Asset Management, which sub advises the fund, says his firm has helped create basic guideposts for sustainable investing during its 17 years in operation.

The firm’s strategy first focused on excluding sectors like alcohol, tobacco and firearms. But thatthesis has evolved. “If you’re going to have sustainable economic growth, you have to address core fundamentals of the economy,” Mr. Richardson says: “energy, water, resources themselves, and food and agriculture.” A company needs to go beyond efficient water use; it needs to make sustainable-water policies part of its overall operation, for instance, by not building factories where water supplies are under pressure.

Sustainable investing “is harder than it looks,” he says. “People need to leave it to experts because we’re charged with figuring this out with more granularities.”

Enter the robo advisers?

Technology may change that. Startups are aiming to make the automated money-management platforms known as robo advisers a central part of sustainable investing.

Some online robo-adviser platforms, marketing themselves to millennial in particular, will pick out investments based on users’ answers about investment preferences, and then put a logarithm to work assembling a “sustainable” portfolio that could include stocks and funds.

Such features, however, rely on the same cloudy data that Ms. Rogers and others in the sustainable-investing business are hoping to clarify. And as with any other investment, consumers should be aware of products that seem easy and too good to be true.

“You can be indexed, or look for funds that are doing the work for you, or you can do it yourself and do a lot of work reading reports and validating data,” she says. “It is just that: It’s a lot of work if you’re an individual investor and want sustainable investing.”

So how does one create a “sustainable” portfolio? Chat Reynders, chairman and chief executive of Boston-based Reynders, McVeigh Capital Management, suggests investors outline their valuesand see where they best align with trusted firms like Vanguard Group that have a wide portfolio of liquid indexed products. As with any other investment thesis, though, the key is due diligence and effort.

“The danger in looking at a huge listing of indexes is that you may end up in less liquid ETFs or funds that seem great on their face but may have fundamental problems,” says Mr. Reynders, whose Boston-based firm creates what it calls “socially geared” portfolios.

There is also the GIIN, or Global Impact Investing Network, which has been leading an effort to collect information about sustainable-investment strategies. The nonprofit’s website includes a clearinghouse of research and strategies related to sustainable investing.

Wall Street gears up

Major investment firms like Morgan Stanley and Black Rock Inc. See the opportunity.

“Clients are really starting to think differently about their portfolios,” says Audrey Choi, chief executive of Morgan Stanley’s Institute for Sustainable Investing. She says a Morgan Stanley survey found that one out of six dollars under professional management is earmarked as sustainable, up from one out of nine in 2012. That increase comes as investors begin to see the benefits of sustainable investing, not just in how a company operates but also in what its stock returns to investors.

“ESG factors are not extra financial factors,” Ms. Choi says. “They are factors that can directly affect the financial outcome of an investment.” She says much of her work focuses on showing people that sustainable investments tend to be less volatile and perform better than their traditional cousins.

Source-wsj.com

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