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Vision Investing

Values, Impact, and ESG

Once a niche corner of the investing landscape, the idea of aligning your investment portfolio with your personal values is much easier today than it has been in the past. Increasing demand has been met with a broad range of solutions focused on everything from environmental sustainability to religious beliefs.

Wells Fargo Investment Institute's new report, Vision Investing: Values, Impact and ESG, looks at the various strategies you can use to align your values and investments; the rapid growth of sustainable/responsible investing and ESG; the question whether you may have to forgo profits for principles; and challenges and trends in Vision Investing.

What is Vision Investing?

Investing that aligns financial objectives with personal values or creates measurable impact has often been called responsible or sustainable investing. Another trend gaining prominence is the incorporation of ESG considerations into the investment process.

Wells Fargo calls the intersection of values-alignment, investing with impact, and ESG integration with traditional investment considerations: Vision Investing: Values, Impact, and ESG.

Wells Fargo Vision Investing includes:

  • A comprehensive integration of ESG assessment into the investment management process
  • Strategies that align investment portfolios with client values
  • Active ownership practices including engagement and proxy voting to achieve impact

Dating back to the 1960s, sustainable investing was relegated to the periphery of the investment landscape. After a slow but steady increase in interest for nearly a half century, sustainable investing interest began to gain broader appeal following the Financial Crisis of 2008, particularly in Europe. The trend of aligning investments with personal values finally broke into the mainstream in the United States in the mid-2010s. According to a recent study, U.S. assets under management nearly quadrupled from 2015 to 2020. Sustainable investing then experienced a meteoric uptick in interest amid the COVID-19 pandemic of 2020, with nearly 25% of all U.S. net mutual fund flows going into sustainable products in 2020.1

You don’t have to trade profits for principles

One misconception is that investors must sacrifice performance to align portfolios with their values. A 2020 Wells Fargo/Gallup survey showed that only 11% of those surveyed already invest in sustainable investments, despite widespread interest.2 This discrepancy may stem from the misconception that these strategies underperform the market. Only one-third of those surveyed believed that sustainable investments match or outperform the market, on average.

Our research indicates that investors do not need to forgo return potential to align their portfolios with their values. To the contrary, a growing body of evidence suggests that financial performance of companies using ESG strategies is commensurate with those that do not.3 Moreover, as shown in the graphic below, adjusting for certain fundamental differences such as style and sector, U.S. ESG stocks showed comparable returns to those of other U.S. stocks.

ESG-related stocks have tended to keep pace

Research has shown that ESG-related stocks have shown comparable returns to non-ESG-related stocks over time, adjusting for fundamental differences such as style and sector.

Chart 8: ESG-related stocks have tended to keep pace – This chart shows the performance of the S&P 500 index, MSCI All Country World index, MSCI ACWI ESG Leaders index, and the S&P 500 ESG index in the form of line charts. The horizontal axis shows years and the vertical axis shows index level. These indices are indexed at 100 with the S&P 500 ESG index outperforming the others from 1/1/2015 to– 12/31/2021. All four lines appear relatively flat through 2016, and then start to rise gradually in 2017 to around 125-130. Between 2018 and 2020 the MSCI All Country World Index line lags the other three index lines and starts to diverge. All lines show a bit of fluctuation over this period. The S&P 500 index, MSCI ACWI ESG Leaders index, and the S&P 500 ESG index rise to around 150-155 by the end of 2019. The MSCI All Country World index lags at around 130. All four lines show a dip in March 2020 due to the pandemic, and then all four lines climb through year-end 2021 with a few slight pullbacks over the period. At the end of 2021, the S&P 500 index and the S&P 500 ESG index are above 200, the MSCI ACWI ESG Leaders index line is 200, and the MSCI All Country World index lags the others and is around 170.Sources: Bloomberg and Wells Fargo Investment Institute, as of December 31, 2021. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. Please see the end of this report for the definitions of indexes and descriptions of asset-class risks.

As the sustainable investing industry continues to coalesce, we expect that an eventual convergence of terminology, improved data reporting, and more clear-cut regulatory oversight likely will support demand growth for sustainable investment strategies. Various regulatory bodies and organizations like the European Union, the CFA Institute, the Carbon Disclosure Project, and even the SEC are taking steps to improve oversight and consistency.

1 US SIF Foundation Report on US Sustainable and Impact Investing Trends -- 2020

2 Wells Fargo/Gallup Investor and Retirement Survey, February 2020

3 In fact, more than 90% of the 2,200 individual studies reviewed by the Journal of Sustainable Finance & Investment have shown a nonnegative relationship between ESG and corporate financial performance, with a majority of findings showing positive results.

Definitions

The MSCI All Country World Index (ACWI) captures large- and mid-cap representation across 23 developed market and 26 emerging market countries.

The MSCI ACWI ESG Leaders Index is a capitalization-weighted index that provides exposure to companies with high environmental, social, and governance (ESG) performance relative to their sector peers. The MSCI ACWI ESG Leaders Index consists of large- and mid-cap companies across 23 developed market and 26 emerging market countries.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value.

The S&P 500 ESG Index is a broad-based, market-cap-weighted index that is designed to measure the performance of securities meeting sustainability criteria while maintaining similar overall industry group weights as the S&P 500 Index.

An index is unmanaged and not available for direct investment.

Risk considerations

All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve.

Sustainable investing focuses on companies that demonstrate adherence to environmental, social, and corporate governance principles, among other values. There is no assurance that social impact investing can be an effective strategy under all market conditions. Different investment styles tend to shift in and out of favor.

The risks associated with the representative index asset classes discussed in this report include: Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation, and other risks. Prices tend to be inversely affected by changes in interest rates.

Alternative investments, such as private equity, are speculative and involve a high degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation, and higher fees than mutual funds. Hedge fund and private capital investing involves other material risks including capital loss and the loss of the entire amount invested. A fund’s offering documents should be carefully reviewed prior to investing.

Exchange-traded funds (ETFs) seek investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched.

ETFs and mutual funds are subject to substantially the same risks as individual ownership of these securities would entail. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

Donor-advised donors do not receive investment returns. The amount ultimately available for donor-directed grants may be more or less than donor contributions to the donor-advised fund. While annual giving is encouraged, the donor-advised fund should be viewed as a long-term philanthropic program.

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Both GMR and GIS are affiliated divisions of Wells Fargo Investment Institute. GMR may provide research analysis for Wells Fargo affiliated mutual funds, private funds and other products, which may also be advised by WFII or a Wells Fargo affiliate (“Wells Fargo”). The analysis utilizes the same processes and scrutiny as for non-affiliated products and WFII is committed to providing research that is fair and unbiased, but a conflict may arise as Wells Fargo may benefit from a favorable recommendation for an affiliated product. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions and estimates are as of a certain date and subject to change without notice.

The information in this report was prepared by the Global Investment Strategy (GIS) and Global Manager Research (GMR) divisions of WFII. Opinions represent GIS’ and GMR’s opinion as of the date of this report; are for general informational purposes only; and are not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally. GIS and GMR do not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

Wells Fargo Wealth and Investment Management, a division within the Wells Fargo & Company enterprise, provides financial products and services through bank and brokerage affiliates of Wells Fargo & Company. Brokerage products and services offered through Wells Fargo Clearing Services, LLC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company. Bank products are offered through Wells Fargo Bank, N.A.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation; an offer to participate in any investment; or a recommendation to buy, hold, or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon.

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