SUSTAINABLE AND IMPACT INVESTING, once considered a niche approach to investing, is proving its staying power. In fact, this approach, which looks beyond traditional investment metrics and takes into account factors such as a company’s governance process, its impact on the environment or how it treats its workers, is growing in popularity. Investors now have more options than ever before. In 2023, there were 183 passive sustainable funds and 463 active funds available in the U.S.11 What’s more, the number of sustainable mutual funds and exchange-traded funds in the U.S. has more than doubled over the past five years, and the total invested in those funds is nearly six times greater than it was a decade ago.2
Part of sustainable investing’s growing popularity is its ability to offer investors a new approach to allocating their money based on their personal preferences, as well as being a powerful new tool in assessing risk and uncovering opportunities in the market. Additionally, the magnitude of opportunities for investors as climate risks come into clearer focus is attracting more and more capital. In 2023 alone, clean energy projects attracted $1.8 trillion in investments globally.3
Watch Haim Israel, head of Global Thematic Investing, BofA Global Research, and Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank, discuss why energy transition and grid upgrades could provide opportunities for investors now and in the future.
Investors are taking sustainability into account more and more because data shows that doing so increasingly makes sense from a financial perspective. “A significant body of research points to the potential for enhanced returns and reduced risk when you incorporate sustainability considerations and traditional investment analysis in your decision making,” says Anna Snider, head of Investment Manager Selection and head of Sustainable and Impact Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. In fact, she adds, “in today’s structurally changing world, we believe that successfully balancing financial outcomes and creating positive change requires skill and continuous integration into an investment process.”
A potential risk-reduction strategy
Because global challenges present considerable risk to the economy and to individual companies, sustainable investing also can help you manage portfolio risk, notes Ekaterina Gradovich, investment manager selection specialist in the Chief Investment Office for Merrill and Bank of America Private Bank. For example, she says, “the substantial economic transformation required for the energy transition and energy independence may determine which businesses remain competitive and profitable in the not-too-distant future.”
In addition, a sustainable and impact investing approach could help provide a buffer for your portfolio from companies whose products or practices may expose them to fines, reputational damage, difficulty retaining employees or other problems. “These factors introduce risks that investors need to consider,” Gradovich says. For example, a study looking at companies in the S&P 500 from 2019 to 2021 concluded that high environmental and social risks may reduce a company’s financial stability and ultimate chance of survival.9
Focused on returns + sustainability
Achieving the dual goals of generating competitive financial returns and supporting positive change requires more than just selecting securities with positive sustainability ratings, Clare DiMaiolo, investment manager selection analyst in the Chief Investment Office for Merrill and Bank of America Private Bank, cautions. “While ratings can be a useful tool as part of a broad evaluation of companies or portfolios, they should not be the sole benchmark for investing choices,” she notes. A close analysis of any strategy’s financial approach is paramount.
Snider emphasizes all strategies must meet both sustainability and investment standards to qualify for a sustainable classification. The assessment for both criteria is performed simultaneously. “Our focus is not on a manager’s moral or ethical preferences, but on the forward-looking economic and investment projections determined by this type of analysis.” While there is a spectrum of approaches to integrating sustainability into a strategy, when determining sustainability status, the CIO Due Diligence team requires all strategies to meet two criteria to qualify for a sustainable classification: intentionality and consistency. The key components of these processes are to evaluate the quality and competitiveness of the investment strategy to establish investment conviction. In parallel, for sustainable strategies, the CIO Due Diligence team reviews the intentionality, consistency and depth of ESG integration.
“Sustainable and impact investing seems likely to grow in the years to come,” Snider believes, “and the tools used to measure sustainability performance will surely evolve and improve.” To that end, she suggests investors consider integrating sustainable and impact investing as part of a balanced, strategic portfolio. After all, she notes, “innovations to address global challenges are creating some of the greatest opportunities we’ll see in our lifetimes.”
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1Morningstar, “U.S. Sustainable Funds Landscape 2023 in Review,” February 2024.
2Morningstar, “U.S. Sustainable Funds Landscape 2023 in Review,” February 2024.
3BloombergNEF, “Energy Transition Investment Trends 2024,” Jan. 30, 2024.
4Chief Investment Office, Merrill and Bank of America Private Bank, “Impactonomics®: Performance Realities: Revisited,” November 2024.
5Governance and Accountability Institute, “2024 Sustainability Reporting in Focus.”
6PwC, “PwC’s Global Investor Survey 2023,” November 2023.
7Chief Investment Office, Merrill and Bank of America Private Bank, “Impactonomics®: Performance Realities: Revisited,” November 2024.
9Gil Cohen, “ESG risks and corporate survival,” Environment Systems and Decisions, November 2022.
10Yale Climate Connections, “Energy loss is single-biggest component of today’s electricity system,” October 2022.
Important Disclosures
All investing involves risk. Past performance does not guarantee future results.
Risk management and due diligence processes seek to mitigate, but cannot eliminate risk, nor do they imply low risk.
Sustainable and Impact Investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
There is no guarantee that investments applying ESG strategies will be successful. There are many factors to take into consideration when choosing an investment portfolio and ESG data is one component to potentially consider.
Social impact bonds are a relatively new and evolving investment opportunity, which is highly speculative and involves a high degree of risk. An investor could lose all or a substantial amount of their investment.
