A brief history of sustainable investing

Sustainable investing has taken off over the past few decades, driven by investors who are increasingly eager to put their money to work to address the world’s most pressing economic, ecological and social challenges. And the COVID-19 pandemic accelerated that interest, highlighting for investors that environmental, social and governance (ESG) factors are relevant, especially in a time of crisis.

Data shows that demand for sustainable investing is durable in today’s post-COVID world. Bloomberg estimates that sustainable assets under management (AUM) are on track to surpass $40 trillion by 2030 – that’s over 25% of all global AUM.

Sustainable investing isn’t just the latest trend, and it’s making a larger-scale difference on the asset management industry. Let’s look back at the history of sustainable investing: how it started, where it is today and what the future may hold for the industry.

18th to early 20th century: The exclusion of ‘sin’ stocks with socially responsible investing (SRI)

Although the COVID-19 pandemic catapulted sustainable investing into the spotlight, aligning your investments with your values is not new. The roots of socially responsible investing (SRI) started with religious groups forbidding members from investing in certain industries that did not align with their values.

Beginning in the 18th century, American Quaker colonies prohibited members from participating in the slave trade and financing “sin stocks,” like guns, alcohol and tobacco.^, For the next 200 years, religious leaders from various denominations continued to lead the niche SRI movement, defining it mostly in exclusionary terms – that is, emphasizing where they shouldn’t invest rather than where they should.

1960–1980: Divestment as a method for social change

Sustainable investing remained largely faith-based until the 1960s and ‘70s, when labor unions and civil rights activists seized upon this tactic. This led to the creation of the first sustainable investing fund in 1971: the Pax World Fund, which provided a platform for investors who opposed the Vietnam War.

In the 1980s, divestment became a popular tactic to force the South African government to end apartheid. In the U.S., over 150 schools, 26 states and several corporations had at least partially divested from South African businesses. This put pressure on the U.S. government to impose economic sanctions, leading to further divestment. Due to the size and scale of divestment (to the tune of $1 billion dollars withheld by the U.S. government), the strategy was a contributing factor to ending apartheid. Near the turn of the century, these objectives broadened to include other societal priorities, such as sustainable development, anti-tobacco and a number of corporate governance issues.

This success of divestment strategies – particularly their role in ending apartheid in South Africa – may have been an inflection point in social awareness and a boon to the prospects of sustainable investing.

2000s: Demand increases transparency

Over the past two decades, an increasing number of industry reports promoted the idea that sustainable investing could also result in more consistent long-term performance.

For example, a 2004 UN Global Compact report “Who Cares Wins” coined the acronym “ESG” for environmental, social and governance and argued that following its principles could help create shareholder value. In other words, it wasn’t just about aligning your dollars with your values, but using an extra lens to analyze a company’s business practices alongside its financials as part of due diligence.

As awareness and pressure increased, corporations started to release more ESG data. This fueled a flywheel of increased benchmarking and reporting, typically pointed at a singular question: is sustainable investing profitable?

Today, there’s a growing understanding that it’s possible to prioritize profitability alongside sustainability. Data has shown that companies with sustainable practices can outperform their peers over the long term, showing that sustainable investing does not always mean sacrificing returns. After decades of research reports and media coverage, this reality has begun to penetrate the broader investment narrative.

Today: Fundamental societal shifts escalate sustainable investment momentum

The pandemic and extreme climate events have potentially created a turning point for asset flows, with investors clamoring for investment strategies that focus on sustainability.

Three-quarters of investors consider a company’s environmental practices, social issues management and governance policies (ESG) when making decisions about their portfolio. And younger generations are more prone to believe they can exert their influence to hold businesses and government accountable to make progress on many societal issues.

The growth of sustainable investing is further emphasized by the European Union (EU) unveiling new regulations through the Sustainable Finance Disclosure Regulation (SFDR) and the Securities and Exchange Commission (SEC) putting more ESG-related regulations in place in the United States. Increasing demand, regulation and awareness across the U.S. market and beyond are helping to fuel this momentum toward sustainable investing.

The next frontier: Personalization

Sustainable investing’s transition from niche strategy to broader adoption has helped secure its place in the financial industry. And because everyone has unique values and causes that they care about, personalization is key to this future of investing.

Sustainable investing, as well as “traditional” investment strategies, are seeing a shift from a one-size-fits-all approach. Mary Erdoes, Chief Executive Officer of J.P. Morgan Asset and Wealth Management, says that “There's a day not too far away where you'll be able to toggle up and down [everything] that you like or dislike and we can spit out an individual portfolio.” And investors seem to agree, as today there’s a greater expectation to provide individually tailored strategies and experiences.

Values-based investing could help unlock this kind of personalization for your portfolio. Values-based investing is an investment approach that reflects your preferences by adjusting exposures to specific companies, sectors or business practices to better align with your values.

In the last few years, advances in cost structures, technology and increasing consumer demand have made portfolio customization – once a manual process at the high end of the market – a more attractive and accessible option.

As a result, personalization may lead the way for new investing options. This could mean a future equipped with a larger suite of investment tools and strategies tailor-made to fit more than an investor’s risk appetite – but a whole range of factors, including how portfolios interact with the world at large.

Ready to learn more about the current state of sustainable investing? Open an account with us to get started or reach out to your J.P. Morgan advisor to discuss your options.

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