How does one ensure that their investments and savings can sustain them comfortably in their retirement years? It is an interesting question and is often at the centre of the client/adviser relationship.
Advisors make estimates of savings, inflation, taxes, growth, interest rates, life expectancy and more. It is a complex and dynamic process always subject to changes in personal circumstances and is affected by the global forces of economic change. During most of the previous 20th century we did not directly consider sustainability as a key factor. The concepts were only beginning to evolve in the 1970’s although by the late 1990’s it was becoming more obvious that the importance of a sustainable investment portfolio, whether it be a pension fund, a foundation or an individual, is a key factor in designing a well diversified portfolio.
This concept is widely accepted in many Pension Funds managing hundreds of billions of dollars in assets. It is widely accepted in the foundation and endowment portfolios as the stakeholders demand that their investments align with the organization’s mission. Even the individual investor now has access to professionally managed investment portfolios that better reflect their personal values. So why don’t more individual investors choose to invest in “sustainable or socially responsible investments”?
To a certain extent it has to do with inertia. If a portfolio is satisfying one’s current needs for safety, growth, inflation protection, and other factors why would a person add another factor into the risks to be considered? This is an appropriate question. The best portfolios reduce risk while ensuring adequate returns above the rate of inflation and taxes.
So really the most important consideration is “Do Sustainable Portfolio’s reduce risk while maintaining return?” Like many financial and economic analysis there is never one absolutely correct answer. A review of recent research though has interesting observations regarding these issues.
Ben Caldecott, director of the Stranded Assets Program at Smith School of Enterprise and the Environment, University of Oxford, Oxford, England notes that “A confluence of risk factors could erode or destroy the value of polluting and environmentally unsustainable assets.” and “While environment-related risks and how they might result in stranded assets is a new, under researched area, investors can take some steps to manage possible developments.” http://www.pionline.com/article/20131205/ONLINE/131209943/steps-to-deal-with-emerging-risks-of-stranded-assets
As a result of these developments investors, advisers, analysts and others in the financial industry need to increase their knowledge and skills in assessing these concerns and adapting portfolios to minimize risk from these factors. Another evolving area in the corporate world is the need for companies to develop and disclose their Environmental, Social and Governance (ESG) performance. The adherence to these criteria are becoming increasingly important. Companies that do not conform to increased performance in these areas might see their securities become restricted from access to large blocks of investment capital as Pensions, Foundations and Individual investors demand greater disclosure in ESG performance.
The Corporate Knights report “2013 Best 50 Companies in Canada” highlights this growing pressure on corporations. “This year’s list of Canada’s best corporate citizens shows that companies are raising the bar on sustainability, a recognition that being environmentally and socially responsible is more than just the right thing to do – it’s good for business.” http://www.corporateknights.com/report/2013-best-corporate-citizens-canada/best-50-2013
How does this impact an investor’s retirement plan? In the last century advisers had to look ahead to gauge the impact of inflation, growth, taxes, interest rates and other economic considerations. In the rest of the 21st Century a well designed portfolio should include a Sustainability component, otherwise portfolio risk will be increased. “New research has found that firms that invest in corporate social responsibility (CSR) initiatives see less risk in their stock prices during economic downturns, benefiting the company, shareholders and the world.” http://blueandgreentomorrow.com/2014/01/01/research-links-sustainability-initiatives-to-investment-stability/
So if your investments do not incorporate the latest information and trends in Corporate Responsibility will you experience more risk than necessary? How can you be sure your investments consider up to date Sustainability analysis? Talk to a qualified investment advisor. The SIPC “Sustainable Investment Professional Certification” indicates the adviser has completed a rigorous program of study and is qualified to give advice on Sustainability and Investments. http://www.ifd-fsi.org/sipc