Disruptive Innovation Could Be Preferred Avenue to Sustainable Investing

Sustainable investing continues garnering attention and the related strategies continue capturing assets. As advisors either well know or are fast learning, this isn't a fad. It's the start of a real trend, one that some experts will be result in trillions of dollars of flows as more investors prioritize sustainability.

A result of the sustainable investing movement is questions. Lots of them. The client inquiries range from what makes a sustainable fund or strategy sustainable to how the indexes built to are bonds part of the sustainable mix and, of course, questions on the efficacy of the strategy itself.

On that  list, it's likely that the inquiry advisors field the most “Is will my portfolio improve by embracing sustainable?” Obviously an important question and one without a uniform answer. It's also one that's intimately tied to advisors educating clients on what assets often serve as the foundations of sustainable funds.

Many of the most basic iterations of environmental, social and governance (ESG) simply avoid certain corners of the market (alcohol, guns, tobacco) and overweight other groups – namely technology. That works, sort of, when stocks are going up. Over the past three years, the MSCI USA Extended ESG Focus Index beat the S&P 500 by 570 points.

Speaking of Tech and Sustainability...

Of course, the green investing middleman can be eliminated and advisors can efficiently overweight tech in client portfolios in the name of sustainability. Data says that worked. Over the past three years, the Nasdaq-100 Index is up 98.3% compared to 68.2% for the MSCI USA Extended ESG Focus Index.

That's a point to remember because disruptive/emerging/innovative technology – however an advisor wants to describe it – is very much at the center of sustainable investing. In fact, the overall movement toward sustainability (excluding investment implications) hinges on technological advancements.

Historians “will identify robotics, artificial intelligence, energy storage, DNA sequencing, and blockchain technology as transformative innovation platforms that entered critical inflection points during this decade,” notes ARK Invest. “While the commercial impact of their productivity boosts could be profound, the five platforms also are likely to bend the curve for each of the UN Sustainable Development Goals (SDGs), increasing the probability of many successes by 2030.”

Sustainability is fluid, but the its marquee elements are economic convergence, healthy economic growth, environmental action and futuristic infrastructure. Within those themes are sub-themes including eliminating hunger and poverty, healthier living/eating, green energy and water concepts and infrastructure innovation.

For advisors looking for a way to message these concepts, think about the oft-highlighted issue of climate change and its deep intersection with technology. In fact, it's technology that's spurring rising sales of electric vehicles – a vital component in sustainability.

“Thanks to the cost declines in lithium-ion batteries as well as advances in artificial intelligence, electric vehicles are likely to transition from niche to mainstream products,” according to ARK. “Already, EVs are superior to gas-powered cars as measured by performance, maintenance, safety, and operating costs. Given lower EV sticker prices, we believe only consumers with specialized needs or preferences will choose gas-powered vehicles.”

Sustainability Certainties Can Benefit Advisors, Clients

Astute advisors know many things. With regards to what's being discussed here, they know clients, particularly those in younger demographics, increasingly invest with a conscious and they want access to innovation.

The value display opportunity for advisors arrives by articulating to these clients that many of the disruptive exposures they crave also check the sustainability box – perhaps with better outcomes than standard sustainable funds.

“We believe that environmental action will begin to meaningfully change the world’s sustainability trajectory: as electric mobility reduces oil demand, as artificial intelligence enables more efficient provision of energy from renewable sources, as gene edited aquaculture reduces pressure on wild fish stock, as 3D printed aircraft parts deliver people from place to place at a lower energy cost, and as distributed ledgers allow governing bodies to track and hold global actors to account more efficiently,” adds ARK.

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