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Interview With an ESG Expert

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Will sustainable investing help you achieve your goals?

Northern Trust ESG Director Sharee Hassan defines sustainable investing (also commonly referenced as ESG investing) and discusses how it can help investors align their investments with their values and preferences.

How does Northern Trust define sustainable investing?

Sustainable investing is an investment solution based on the philosophy that environmental, social and corporate governance (ESG) analytics can complement quantitative or fundamental investment techniques to mitigate risks or capture new opportunities.

We believe the long-term financial success of our clients depends upon a healthy global environment, a stable society and well-functioning, well-governed companies. Northern Trust Wealth Management seeks to be at the forefront of empowering clients to incorporate their ESG investment objectives without jeopardizing financial goals, guiding clients in measuring ESG risk exposures and helping families establish ESG-related investment guidelines, consistent with our fiduciary heritage.

What kinds of goals can a sustainable investing approach help an investor pursue?

Sustainable investment objectives, whether to improve the health of the planet, benefit people or strengthen corporate processes, are increasingly becoming part of many investors’ priorities. Today’s sustainable investor can employ a variety of approaches toward their goals — including engaging companies, excluding specific securities and voting proxies — while seeking to mitigate risks and capture new investment opportunities. The data fueling ESG strategies have improved, enabling investors to more effectively marry financial and risk-management goals with the sustainability issues that matter to them. We help investors meet sustainable objectives within a goals-based framework through the use of select ESG investment products and superior evaluation and reporting capabilities.

Our dedicated team seeks to understand not just what you want to achieve, but why. These insights help us build a plan that will truly honor your intentions and avoid unintended consequences.

What’s the difference between sustainable investing and impact investing?

Sustainable investing acknowledges the relevance of ESG issues that can affect the long-term health and stability of a company. Investors can use ESG data, tools and analytics to qualify or disqualify an investment based on their ESG objectives and financial needs. For example, investors may choose to exclude companies based on their involvement in specific types of business, invest in companies that are ahead of their peers in managing ESG risks or focus on specific themes such as climate change.

By contrast, impact investors typically work toward a specific mission, using their capital to influence a particular social issue, usually in a specific community or demographic. The goal is to prioritize social impact rather than the maximization of financial return. Impact investing is typically through private and direct investments.

Impact investing can be a great option for investors who want to invest locally to make a difference in their own communities. For example, many investors who aim to address social issues related to affordable housing, healthcare, education, employment, social services and other community needs employ impact investing.

How can a client interested in sustainable investing figure out how to incorporate it in their portfolio?

The first step is to discuss sustainable investing with your advisor. They will talk with you about your values to develop a deep understanding of the goals you would like to pursue. Are you more focused on environmental issues, social issues or do you want to be more aware of your overall ESG risk exposures and manage them? When your advisor has a better understanding of the goals you would like to achieve, they will work to identify strategies that align best with your values.

From there, your advisor will propose a plan to incorporate appropriate investment solutions into your portfolio. This plan will function as a roadmap from your current portfolio to your future portfolio, taking into account considerations such as tax efficiency and cash-flow needs. The plan also involves a full understanding of projected tracking error — the amount you can expect your returns to diverge from your benchmark’s — and any potential biases or gaps the changes would introduce into the portfolio. Your advisor also has the capability to run an ESG Portfolio Report, which provides an analysis of the ESG ratings and risk exposures in your portfolio and compares them to the proposed portfolio.

If you decide to proceed, your plan will be implemented over time. Your advisor will serve as a resource — providing the expertise and capabilities you need to best meet your sustainable investing and financial goals.

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Sustainable Investing

Align investments with values.

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Disclosures

This document is a general communication being provided for informational and educational purposes only and is not meant to be taken as investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions or inflation. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein.

LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Periods greater than one year are annualized except where indicated. Returns of the indexes also do not typically reflect the deduction of investment management fees, trading costs or other expenses. It is not possible to invest directly in an index. Indexes are the property of their respective owners, all rights reserved.

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