Sustainable Investing: Strategies For Investor Impact

Sustainable investing is an investment strategy that takes into account a company's environmental, social, and corporate governance (ESG) factors, in addition to financial considerations, to promote positive societal and environmental outcomes. It involves directing investment capital towards companies that aim to combat climate change and environmental destruction, and promote corporate responsibility and ethical business practices. This approach allows investors to support companies that align with their values and contribute to global challenges such as climate change, social inequality, and sustainable development.

Environmental, Social and Corporate Governance (ESG)

ESG investing involves evaluating companies or projects for potential investment, taking into account several environmental, social, and governance criteria. The aim is to support companies that align with responsible business practices and contribute to solving global challenges like climate change, social inequality, and sustainable development.

ESG factors are a significant consideration in sustainable investing, but they are not the only factors. There are additional strategies investors can use, such as activist investing and impact investing.

ESG integration is a type of investment that incorporates environmental, social, and governance factors into traditional financial analysis when evaluating investment opportunities. This means that, alongside financial metrics, ESG considerations are used to assess a company's overall risk and potential.

The benefits of ESG investing include contributing to positive social change, directing investment capital to companies that seek to combat climate change and environmental destruction, and promoting corporate responsibility. ESG investing also allows investors to support companies that align with their values and beliefs, creating a sense of purpose and satisfaction alongside financial gains.

However, there are challenges to ESG investing. A lack of standardized metrics and reporting can make it difficult to compare investments accurately. Additionally, "greenwashing", where companies exaggerate their sustainability efforts, is a significant issue. Balancing economic returns with environmental and social objectives can also be complex.

Socially Responsible Investing (SRI)

SRI investors will typically choose investments that align with their values and avoid investments that don't. This can be done through negative screening, where investors avoid owning securities sold by companies that are seen as not socially beneficial, and positive screening, where investors actively choose to support companies that implement positive social and environmental policies.

SRI investors are often motivated by environmental, social, and governance (ESG) factors. They may choose to invest in companies that are engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts, while avoiding investments in companies that produce or sell addictive substances or activities (like alcohol, gambling, and tobacco).

SRI has been growing in popularity in recent years, with more funds and investment vehicles becoming available for retail investors. According to Morningstar, there were 303 sustainable open-ended mutual funds and exchange-traded funds in 2019, up from 111 in 2014. A 2019 Morgan Stanley survey also found that 85% of individual investors are interested in sustainable investing.

When building an SRI portfolio, investors can choose to do it themselves or seek help from a human financial advisor or a robo-advisor. It's important to do your research and understand each fund or manager's investment strategies and values. SRI funds may be less volatile than traditional funds, and there is evidence that they can perform as well as, or better than, non-SRI funds.

However, it's important to keep in mind that SRI investments are still investments, and investors should carefully weigh the potential for financial returns when making decisions.

Impact Investing

The intention behind impact investing is to generate positive, measurable social and/or environmental outcomes alongside financial returns. Impact investors expect their investments to generate a financial return or, at the very least, a return of capital. The financial returns of impact investments can vary, ranging from below market to market rate, depending on the investors' strategic goals. Impact investments can be made in both emerging and developed markets, and they span various industries, including energy, agriculture, healthcare, and education.

A key characteristic of impact investing is the commitment to measure and report the social and environmental performance of the underlying investments. This ensures transparency and accountability and helps to build the field of impact investing. Impact investors approach impact measurement in different ways, depending on their objectives and capacities, but best practices include establishing clear social and environmental objectives, setting performance metrics and targets, monitoring and managing the performance of investees, and reporting on social and environmental outcomes to relevant stakeholders.

Ethical Investing

There are several strategies that ethical investors can use. One is negative or exclusionary screening, which involves excluding specific sectors, companies or practices from a portfolio based on environmental, social and governance (ESG) criteria. Positive or best-in-class screening is another strategy, which involves including companies in a portfolio that demonstrate positive ESG performance compared to their industry peers.

Green Investing

Green investors typically seek to support companies or projects committed to the conservation of natural resources, pollution reduction, or other environmentally conscious business practices. Some common green investments include green bonds, green exchange-traded funds (ETFs), green index funds, green mutual funds, and stocks in environmentally friendly companies.

Pure play green investments are those where most or all revenues are derived from green activities. However, the term "green" is not firmly defined, and some investors interpret it to include companies with strong environmental commitments across multiple revenue streams.

When considering green investments, it is essential to conduct thorough research, as branding alone may not confirm a company's commitment to green initiatives. Prospective investors should examine a fund's assets and consider independent evaluations, such as sustainability ratings, to assess the sustainability of their investments truly.

Frequently asked questions