Will 2020 Make Us More Empathetic Investors?

Investment dollars can make an impact, so be sure your impact is a good one.
Jan 28, 2021

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How do you quantify the devastation of 2020? There are the hundreds of thousands of people who lost their lives to COVID-19. There are the known and many more unknown victims of police brutality, like Breonna Taylor and George Floyd. You could count the number of lives upended by the worst California wildfire season of all time, or the crushing number of hours put in by essential workers.

No matter how you tally it, the past year was devastating for many. Perhaps that’s one reason why investors and financial institutions are taking notice: Both are thinking more deeply about socially responsible investing.

Investors put their money where their values are

Sustainable investing has already been on the rise for some time, but the events of 2020 may make the practice more widespread. In a survey of 500 investors by Aviva, a U.K.-based insurance company, 55% of respondents said that the pandemic had impacted the likelihood that they would take ESG, or environmental, social and governance, factors into consideration when investing. Of those who said they already consider ESG, 81% said the pandemic made this even more important.

Carole Laible, CEO of investment advisory firm Domini Impact Investments, says people have had a feeling of helplessness and want to do something about it. “That’s a great way to start, to think about an investment strategy where you can earn competitive returns but also build the future that you want to live in,” Laible says.

According to investment research firm Morningstar, that shift may already be reflected in where people are investing: The firm’s analysis shows that by July 2020, sustainable funds had attracted more flows for the year than in all of 2019.

Blair Vorsatz, a Ph.D. candidate in finance at the University of Chicago Booth School of Business who has researched mutual fund flows during the COVID-19 crisis, says investors may be starting to view sustainability as a necessity rather than a luxury — something they aren’t willing to give up even during a crisis.

“Now, people are much more conscious that there could be these kinds of disasters, whether they’re environmental or social or political, and so I do think that has really helped make people think more about sustainability,” Vorsatz says.

Sustainable investment options are growing

Investor interest in socially responsible investing isn’t the only thing that’s increased. According to Morningstar, as of the third quarter of 2020, a record 53 new sustainable funds had become available in the U.S., indicating investment providers are stepping up to meet demand.

“I think you can even see the growth overall across the full ESG space has been amplified as a result of the pandemic,” Laible says.

And while the “environmental” component of ESG investing has long been a more popular (and more measurable) part of the ethical investing equation, recent events may have started to give the “social” component its due.

Following widespread protests against police brutality, robo-advisor Betterment started offering automated portfolios that include the Impact Shares’ NAACP Minority Empowerment ETF, or NACP, which donates net advisory profits from its management fee to the NAACP. Another robo-advisor, Ellevest, has started screening its Intentional Impact portfolios for practices shown to disproportionately harm people of color, such as private prisons.

2 ways to start socially responsible investing

Sustainable investing was initially fueled by people who wanted their money to create a positive impact, but there’s mounting evidence that sustainable investing can be good for your bottom line, too. Several studies have shown that sustainable funds can not only match traditional funds in terms of performance, but also often outperform them — even during volatile markets like we saw in early 2020.

Another factor in sustainable investing’s growing popularity is availability: Investing ethically is more accessible than ever. Perhaps the easiest way to start is with a robo-advisor, which will build and manage a portfolio for you. Several are now offering socially responsible portfolios for no extra charge.

A second option is to build a portfolio yourself using ESG funds. A fund’s ESG score will give you an indication of how well the companies in that fund are rated in each category. There are even some funds dedicated to specific causes. Investing in ESG funds allows you to invest in lots of different companies all at once, rather than picking and choosing individual stocks.

Disclosure: The author held no positions in the aforementioned investments at the original time of publication.

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