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Some on Wall Street are making a new bet on investors' consciences

Evelyn Cheng

Several fund managers are making a new bet that — at long last — investing in sustainability, fair trade and other socially conscious buzzwords will finally pay off.

"Incorporating sustainability metrics is no longer just a nice-to-have, or something to help you sleep at night. It's sound investment sense," Michael Baldinger, head of sustainable and impact investing at UBS Asset Management, said in a statement early last month. UBS created the role last summer, and the firm published a white paper in January on such investing.

For years, socially conscious investing tactics haven't seemed to work. Returns on such funds have generally only managed to match benchmark indexes, while typically charging higher management fees.

A key reason for renewed optimism on such funds is a changing mentality on so-called "values-based" investing or putting money into companies with solid records on the environment, social issues and governance (ESG). In the past, funds tried to screen out "bad" companies such as tobacco firms, rather than actively seeking out "good" ones. But management scandals at companies like Wells Fargo (WFC) have pushed governance and environmental awareness to the forefront of many investors' concerns.

"Now it's evolved to a place where asset managers believe ... positive governance attributes are likely to reward shareholders," said Michael Arone of State Street Global Advisors. "The trend in the industry is trying to meet the growing demand of these investors."

Big spike in the money that's invested

Assets managed with ESG strategies in 2016 totaled $8.1 trillion, nearly double the $4.8 trillion in 2014, according to industry group the US SIF Foundation. Their study found 300 money managers and 1,043 community investing institutions that used such strategies.

At least three firms announced "values-based" investment products in the last several weeks.

Retirement plans got their first series of target-date ESG funds on Feb. 28, when Natixis Global Asset Management launched the industry's first. The company picks companies whose business practices should allow them to benefit from global efforts to reduce carbon emissions.

The research behind the target-date funds comes from Mirova, an affiliate based in France, where ESG investing has been a theme for some time.

"There's this misconception that ESG asset managers are not paying attention to those fundamentals that all asset managers are paying attention to, and somehow we're going to be left behind," said Kenneth St. Amand, client portfolio manager at Mirova.

"We're looking for all those fundamentals you'd expect your asset manager to think about," he said. "In addition, we're looking for these ESG issues that could adversely affect that business through a lawsuit.

The Trump effect

There's increased investor attention to social and environmental issues. President Donald Trump 's election has sparked discussion on topics such as climate change and immigrant labor.

Right now, "a lot of people say the election and the new administration is a reason for people to want to invest in a socially responsible way," said David Kathman at Morningstar.

In a January survey of 825 Americans, online brokerage Motif found 83 percent indicated that their personal values are somewhat or very important in making investment decisions. The study also showed about three-fourths of women and millennials said they would change investment decisions that did not match their values and causes.

Motif last week launched a tool for automating the selection of ESG-focused stocks, based on data from MSCI.

"We wanted to get this pushed out very quickly … because I think people are going to care more now," Motif founder Hardeep Walia said of his firm's new product, which looks at sustainability, ethical business management and fair employee treatment.

Hardeep also touts his product's ability to show investors exactly which stocks they own in real-time, compared with monthly or quarterly statements of top holdings from mutual funds. "I don't think you can do ESG out there without transparency," he said.

Finally, last Thursday, S&P Dow Jones Indices launched the S&P Green Bond Select Index to track bonds that finance environmentally-friendly projects.

Ed Farrington, an executive vice president at Natixis for retirement strategies, compared the emergence of new ESG funds to investors' views four decades ago on buying assets in emerging markets such as China, India and Brazil. Then, investors didn't recognize the benefits of holding assets less sensitive to volatility in U.S. markets.

"ESG is a question of how you fund your business" and long-term economic consequences, he said. "It's not a fad. It's just a new series of questions to address a real trend."

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