2 wood blocks with Environment - Social - Governance written on them

Introduction to Sustainable Investing

What is Sustainable Investing?

For many high-net-worth investors, it’s not enough to earn competitive financial returns. They also want to have a positive impact on the world—whether that means contributing to a cleaner environment, reducing greenhouse gas emissions, promoting peace and prosperity or ensuring a safe, healthy and inclusive society.

Sustainable investments (an increasingly popular umbrella term for the field of social impact investing) aims to deliver both financial and social performance. They seek to enable investors to do well by doing good.

More and more investors are recognizing the benefits of sustainable investing.

The US Social Investment Foundation reports that, at the end of 2019, there were $17.1 trillion in total assets under management that used one or more sustainable investing strategies, a 42 percent increase in just two years.

That means that nearly one in every three dollars under professional management in the United States pursues a sustainable strategy.

The History of Sustainable Investing

Sustainable investing has a long history in the United States, with roots in organized religion and the anti-slavery movement. Some scholars trace its beginnings to the 18th century, when John Wesley preached on “The Use of Money,” making the case that good Methodists could pursue profits as long as they hurt neither themselves nor their neighbors.

The modern era for sustainable investing began in the 1950s, when some investors began to look for ways to eliminate “sin stocks,” typically those issued by alcohol, tobacco and gambling companies.

As the protest movement of the 1960s took hold, screens expanded to exclude defense stocks and environmental polluters.

The highly effective initiative to divest from apartheid South Africa in the 1980s raised the profile of socially responsible investing considerably.  

SRI funds and managers proliferated, and the first socially responsible benchmark, the Domini Social Index (now the MSCI KLD 400), was launched.

Today sustainable investment has become mainstream.

Institutional investors see ESG or environmental, social and governance screens as an important way to manage risk—and so incorporate these factors into their overall portfolio strategies.

Mutual funds, ETFs and retirement plan options make SRI & ESG investing accessible to a broad spectrum of investors, while specialized impact investment strategies in the private equity, venture capital, real estate and private debt sectors have been developed for the high-net-worth market.

Methods of Sustainable Investing

There are four fundamental approaches to sustainable investing which can be pursued separately or together within a diversified portfolio. They include:

1. Socially Responsible Investing (SRI)

SRI is also referred to as negative screening, or excluding companies from a portfolio that don’t align with an investor’s values.

As described above, this began with sin stocks (alcohol, tobacco, and gambling), and later expanded to encompass a growing number of potential social (weapons, prisons, gender equity, human rights) and environmental (fossil fuels, deforestation, pollution) options.

One firm that does a nice job of tracking and grading a mutual fund’s exposure to various causes of concern is As You Sow, a longtime leader in the field of shareholder activism.  

In addition to focusing on what is excluded from a portfolio, some SRI funds also seek to increase exposure to companies that offer solutions to some of the world’s most intractable problems.   

Investment theory suggests that limiting the scope of the investment universe reduces expected returns. On the other hand, SRI investors argue that more responsible companies should be expected to outperform in the long run. 

2. Shareholder Advocacy

As major corporations control vast resources, their decisions and actions can potentially have great impact on people and planet.

Publicly owned companies are required to hold shareholder meetings for the purpose of holding votes on certain key issues, such as the election of board members and executive compensation programs.

Shareholders can also introduce matters to be voted upon at these meetings. This is a long-standing tool for shareholder activists, including the managers of some socially responsible investment funds, to attempt to improve corporate behavior.

This type of shareholder engagement, which can be considered to be a subset of SRI investing, represents an increasingly important part of the sustainable investing landscape.

Data reported in Politco from the Sustainable Investments Institute indicates that a record 282 resolutions focused on environmental, social and governance (ESG) issues were filed during the 2022 proxy season—and 34 of them won majorities.

3. ESG Investing

Environmental, social and governance (ESG) investing, although relatively new has become the predominant type of sustainable investing.

The term is believed to have first come into use in 2005 through an initiative of the United Nations.

It refers to using non-financial data about a firm’s environmental footprint (greenhouse gas emissions, air and water pollution, energy efficiency, waste management), treatment of people (diversity, labor standards, community relations, human rights) and corporate governance (board independence, executive pay, corruption, political activity) to help guide investment decisions.

It is only in the past decade or so that this data has become widely available. 

ESG data measures important risk factors that may have been overlooked in the past.  For this reason, it has gained rapid and widespread acceptance.

As reported by Morningstar: “ESG isn’t just about values, it’s about long-term risk management that affects all investors.” The downside of broad appeal is that some ESG funds may not align very closely with a sustainable investor’s deeply held values.

Some of the largest ESG funds own major oil and gas companies like Exxon and Chevron.

There are also numerous issues with how ESG data is measured and scored, and a lack of standardization in the field.

As a result, it can require significant due diligence to pick a great ESG fund (see our Investing for Impact in Public Markets article for more detail).

4. Impact Investing in Private Markets

Similar to philanthropists, impact investors are focused on using their resources to make positive, measurable change in the world.

While investing capital is clearly quite different than donating it, the lines can be blurred. For example, non-profits can make investments in social enterprises (see below) and impact investors can accept below-market return expectations in exchange for meaningful impact.

Unlike the SRI and ESG strategies described above, which operate predominantly in the public markets, impact investments are mostly private.

In the public sphere, securities are primarily traded on “secondary” exchanges like the NASDAQ or the New York Stock Exchange.

When you buy or sell shares of a company, someone else (not the company itself) is usually on the other side of that transaction.  While you can build a portfolio of public securities that is aligned with your values, these trades on the secondary market have very little (if any) direct impact on the company, and that effect is not measurable. 

In contrast, providing new (private) capital for a specific purpose can produce a tangible measurable result. 

Common examples include the number of affordable housing units built and gigawatts of clean energy produced.

This is the realm of impact investing. 

Types of Impact Investing

Impact investments are typically structured as funds focused on private debt, private equity or private real asset opportunities.

  • Loans with Purpose. On the debt side, loans can be used to fund worthwhile purposes like building affordable housing or solar farms, supporting communities and non-profits, or lending to underserved borrowers such as women in developing countries (via microfinance) and minority led small businesses.
  • Social Enterprises. Equity investments typically emphasize multiple bottom-line social enterprises (focused on people, planet and profit). These firms, which often are developing or implementing new technologies, are found in industries such as finance, education, health care, renewable energy, waste management, resource efficiency, water purification and sustainable agriculture. Many funds and companies of this type are run by and/or are designed to specifically support individuals from underserved populations.
  • Real Assets. Real asset funds develop or acquire tangible assets such as affordable housing complexes , green office buildings, clean energy infrastructure, regenerative farms, land conservation easements and sustainably managed forests.  The performance of these (and other) impact investments are often relatively uncorrelated to that of the public stock and bond markets.  As a result these offerings can provide a combination of: 1) meaningful and valuable portfolio diversification, 2) measurable impact and 3) significant return potential. 

Types of Sustainable Investments

Sustainable investments can take many forms.

From a portfolio construction perspective, they are available in almost every asset class including stocks, bonds and real assets, as well as in different sub-asset classes such as small company stocks or firms in emerging markets.

Sustainable investments also vary thematically, spanning across a wide range of social and environmental objectives.

Economically, they range along a continuum from primarily market-based strategies that seek to limit risk through ESG analysis to values-driven impact investments that may sacrifice some degree of expected return to achieve positive impact.  

For example, loans to non-profits or members of disadvantaged communities may be at below market rates.

On the other hand, investments such as green buildings, clean energy, and new technologies may generate very attractive and competitive risk-adjusted returns.  

Be advised that private impact investments, particularly in private equity and real assets, may not be suitable for many investors.

They typically offer limited (or no) current liquidity, long investment horizons and high required minimum investment amounts.

It also takes a considerable amount of time to research and fully understand many complex offerings.

Getting Started with Sustainable Investing

Most investors begin with ESG and SRI mutual fund offerings.

Impact investing tends to be most popular with high-net-worth, highly-motivated individuals seeking to make the greatest possible impact with their assets.  

Wherever you are on this journey, we applaud your interest and commitment.

Colorado Capital Management is passionate about sustainable investing and helping clients make an impact with their assets. If you have at least $500,000 to invest, we would be delighted to be an expert guide for your impact journey. 

Senior Financial Advisor | + posts

An entrepreneur and world traveler, Colorado Capital Management vice president and co-owner Lee Strongwater brings a global perspective to investments and life planning.

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Jason Black, Financial Advisor (CFP)

Jason Black, CFP ®

With a drive to live purposefully and passionately, Jason focuses on helping clients to live in abundance.

Jason is a partner and senior advisor at Colorado Capital Management.  He brings more than 15 years of varied experience working in the financial services industry. He joined CCM after a long search to find the perfect firm that aligned well with his values and mission. Jason is passionate about helping individuals and families live abundant and intentional lives. He is proud to be part of a Certified B Corporation, doing meaningful financial and investment planning for clients, while also focusing on socially responsible business practices and making a positive impact. As a Chartered SRI CounselorSM, Jason has a strong background and keen interest in sustainable investing and enjoys helping clients understand the merits of this approach. Jason is also a Certified Financial Planner™ and has a bachelor’s degree in business administration from the University of Colorado. 

Before joining CCM, Jason worked with Jackson National as a consultant for financial advisors. He helped create meaningful connections with families, creative asset allocation strategies, and tax-advantaged retirement-income solutions. During his tenure there he worked with over four thousand financial advisors across the country, was recognized multiple times as consultant of the year, and also managed a team of twenty-five individuals. 

Jason is happily married to his wife, Bridget, of thirteen years, who he met while in college at CU. Together they have a son and daughter, and a Frenchie named Coco Disco. They live in the Whisper Creek neighborhood of Arvada. When Jason is not at work, he and his  family can often be found making turns in Summit County, wakesurfing in Glendo, WY, cooking, dancing and traveling.

Erica Loughrey, Associate Financial Advisor

Erica Loughrey

Erica is passionate about providing purposeful advice to help clients enjoy a meaningful life.

Erica is an advisor at CCM. She joined the firm in 2021, fulfilling her desire to work for a values-based company with a deep commitment to making an impact. She moved from her hometown of Anchorage, Alaska and quickly fell in love with the sunny and beautiful state of Colorado. She brought with her prior experience as a para-planner and is delighted to be engaged in a profession that empowers individuals to flourish financially. She believes strongly in exceptional client service and creating lifelong generational relationships.

In 2022, she accomplished two of her major career goals, finishing her master’s degree in financial planning (MSFP) and earning her Certified Financial Planner™ designation.

Erica enjoys spending time outdoors and traveling to exotic locales. In her free time, you can find her out skiing, hiking, scuba diving, practicing yoga or jetting off to new places to explore. She has a never-ending list of travel plans, having already visited over 20 countries, and feels lucky to have so many wonderful opportunities and adventures.

Lee Strongwater, Senior Financial Advisor

Lee Strongwater, WMS

An entrepreneur and world traveler, Colorado Capital Management vice president and co-owner Lee Strongwater brings a global perspective to investments and life planning.

For more than 15 years, Lee has passionately assisted clients with their financial planning and portfolio management needs. He especially enjoys helping them live more meaningful lives and invest in ways that are aligned with their values. Lee holds a bachelor’s degree in political science from the University of Colorado and a master’s degree in international affairs from Columbia University. He also holds the Wealth Management Specialist (WMS) certification.

Before joining Colorado Capital Management, Lee was a managing partner at Strongwater-Schott, a fee-only investment management and financial planning firm in Denver. Prior to that, he was an entrepreneur who helped start and manage several small firms, including a children’s product company that went public in 2007.

Lee is an active volunteer for several organizations. He is a past President and current member of the Board of Directors for the Boulder Jewish Community Center, an organization that is highly respected on both a local and national level. Lee is also on the Investment Committee of Girl Rising-Global Education, a venture philanthropy fund that invests in social entrepreneurs with culturally-relevant ideas. The fund’s investments promote gender equality and improve educational outcomes for girls and boys living in poverty in Kenya and India.

Lee is married and has two daughters. He enjoys hiking, skiing, traveling—mostly to Mediterranean countries—and trying out new recipes from his journeys. When he’s not on the go you can find him engrossed in a book.

Steve Ellis, Senior Financial Advisor

Steven Ellis, CFA

Steve Ellis has spent his career making an impact, so it’s not surprising that Colorado Capital Management’s founder and president launched the firm’s entry into impact investing.

He brings over 30 years of experience as a financial advisor to high net worth clients. His early work included teaching college courses in accounting and finance, consulting for a major accounting firm, and researching and acquiring investments as the chief due diligence officer of a leading national financial planning firm. Since 1989, he has advised individual and institutional investors on the management of their wealth. Steve is a Chartered Financial Analyst (CFA), holds a business degree from the University of Colorado, magna cum laude, and a master’s degree from Cornell University.

Steve launched the firm’s entry into impact investing in 2012 and is committed to helping build the field. Steve is a passionate speaker on the topic. He has taught about impact investing at various conferences and classes around the country, including as a past faculty member at Middlebury Institute of International Studies. He is listed in the Who’s Who in Impact Investing.

Steve is married, with two daughters, enjoys hiking, biking, skiing, tennis and bridge, and is actively involved in the community. He has served on numerous boards and committees for a wide array of nonprofit organizations, including the Boulder JCC, Rose Community Foundation, Jewish Family Service, and Friendship Bridge. His passion for impact and community service helped lead Colorado Capital Management to become a Certified B Corporation and to build a strong culture of volunteerism and philanthropy.