Citi Perspectives Spring 2020

Sustainable investing can pay off Impact investing, once perceived as a semi-philanthropic or altruistic move, is increasingly driven by fiduciary duty. In some cases, sustainable investing aligns directly with a company’s core business or aids in the management of its supply chains. Impact investing also can help boost stakeholder perceptions or contribute to an organization’s commitment to, say, shaping a sustainable economy. While in other cases, the key force behind ESG investing may be a perceived risk to ignoring ESG impacts. Bottom line, sustainable investing carries with it a responsibility to weigh traditional investments risks and returns along with ESG factors. That said, research by Federated’s Hermes Investment Management 3 found that companies with good or improving ESG characteristics have on average outperformed companies with negative characteristics. “This is being driven by the strength of their corporate governance and, for the first time since our investigation began in 2014, social metrics,” said Geir Lode, Hermes’ head of global equities. In a separate report, 4 Hermes concluded that even in a short-term environment like money market funds, the considerations of long-term, material ESG factors can help mitigate risk. Varying MMF approaches While most money market fund providers use similar types of ESG factors to evaluate potential investments, they do not all use the same strategy to incorporate ESG principles into their offerings. This can create challenges for institutional investors who may be looking for more of an “apples to apples” comparison across funds. Some funds use an exclusionary approach, which precludes holding securities in a particular industry, such as tobacco manufacturing or oil and gas, for instance. Others take a sensitivity approach where rather than strictly excluding a certain sector they would give preference to higher-scoring securities 3 Source: https://www.hermes-investment.com/wp-content/uploads/2018/10/hermes-esg-investing.pdf 4 “ESG in Money Markets: Long-Term Perspectives in a Short-Term World”, Federated Investments Hermes Investment Management, July 2019