Sustainable investing has seen significant growth in the last few years, as more and more investors become increasingly concerned about challenges the world faces today, and as more information becomes available about how well sustainable investments perform, or outperform traditional investments.
Daily news and sometimes personal experiences prove the impact of climate change, while other environmental, social, and corporate governance issues on investments, local communities, and the planet have brought sustainable investing more into everyone’s radar.
However, sustainable investing can be a confusing mix of terms and approaches when managing your finances is already a daunting task.
Then, there are issues such as a lack of consensus over terminology, regulatory guidance, and a lack of a clear- cut investment approach to define with absolute confidence that you are “investing sustainably.”
Rather, sustainable investing consists of a range of evolving approaches that asset managers and wealth managers adapt or incorporate into their existing processes. As such, most investors fall into having to figure it out on their own through trial and (oftentimes costly) error or are at a loss on where or how to start, despite their growing interest.
However, there are steps you can take to have some clarity on where to begin, how sustainable investing can work for you, your risk profile, and your portfolio, and what you could be doing to align your investments to your personal stance and beliefs:
Defining sustainable investing
In a nutshell, sustainable investing seeks to deliver competitive financial results and profits not just solely for the investor, but for other people, and the planet in general.
Some people might, at times, conflate sustainable investing as activism. In some ways, it could be.
But first and foremost, sustainable investing is an investing approach. Environmental, social, and corporate governance (ESG) issues undoubtedly impact investments, and to seek profits without taking into account how investments affect other people and the planet ultimately makes investing in itself unsustainable.
Sustainable investing is simply the awareness that investing must be done consciously to either minimise negative impact on the sustainability of the world, drive positive impact, and keep investments profitable over the long term – as investments are embedded in a bigger context, and systemically impact or are impacted by issues on sustainability.
Sustainable investing is the knowledge that investments and investment systems do not exist in a vacuum, and for businesses to be profitable over the long-term (much like how most investments are long-term undertakings), the systems they are embedded in also need to benefit.
“Sustainable investing is simply the awareness that investing must be done consciously to… minimize negative impact”
Sustainable investors push companies to commit to net-zero emission targets, and encourage them to address ESG (Environmental, Social, and Corporate Governance) issues.
This urges companies to shift to purpose-driven, stakeholder- centric business models to help them take a more sustainable path to being a profitable business over the long term.
- While “sustainable investing” is an umbrella term “responsible investing,” “ESG investing,” and “impact investing” are also used interchangeably.
- “Responsible investing” is an older term, shortened from “socially responsible investing,” or SRI, which was used in the late 20th century to describe the forerunner to today’s sustainable investing.
- “ESG” is easy to use but is better suited to describe the issues of concern and the related metrics that have become so widely used.
- “Impact” is better suited to describe the part of sustainable investing that emphasizes the broader effects of investments on people and planet.
Identifying your motivations
Investors are rarely exempt from the impact of ESG issues, since prior to the investment context, each investor has their own sustainability concerns, whether it affects them individually, their loved ones, or their community.
Some investors learn this the hard way, when investments fall prey to risks either undiscovered or ignored, or companies and issuers are embroiled in controversy, accused, or found to be greenwashing.
“Whether it’s a choice in what we buy, who or what we work for or where, or our lifestyle choices, this new age of information and technology has also increased our awareness of consequences – our systemic impact.”
It’s not surprising that more and more investors or investment decision-makers increasingly have sustainability concerns when it comes to their own investments.
The end goal is still the same as with any investment approach – improve the investment, and drive profits, but now it is coupled with the motivation to improve the world. For a business to benefit and be sustainable in the long term, so too must the system it is embedded in.
This adds an interesting dimension from where you can look at risk and identify opportunities. This helps avoid negative outcomes, and advance positive outcomes for people, the planet, and profits.
Getting started on Sustainable Investing
The assumption that sustainable investing is a single unified investment approach has led to confusion and a mismatch between investor expectations and investment outcomes. It is more accurate to say that sustainable investing covers a range of approaches that are used to apply a sustainability lens to investments.
As everyone’s needs, wants, goals, and personal circumstances differ – so too does investment approaches. And there isn’t a clear- cut single method to qualify as sustainable investing. One way that helps is to identify the activities that are designed to achieve that goal – whether it’s minimizing negative impact to investments or real-world outcomes or advancing positive impact, and a financial advisor will have direct insight into what these activities would be a good place for you to start.
If you’re looking to build or review your portfolio according to your sustainability concerns, it helps to ask these questions:
- Are there issuers, companies or investments you want to avoid based on the products or services they provide, the industry or controversies they are a part of? If so, you might want to exclude these products from your portfolio.
- Are your investments geared toward long-term sustainability? You can take a look at what you have or don’t have yet in your portfolio– are you invested in companies with themes such as renewable energy, clean water, or clean technology? Are the companies you invest in geared towards promoting gender equity, social welfare, health and well-being?
- How well are the issuers you are invested in addressing environmental, social, and corporate governance issues? ESG ratings can help you identify whether your investments are at risk, as time and time again has proved that how well and how soon ESG issues are identified and managed is a telltale sign of a company’s long-term profitability.
- Which companies are leading their sector or industry when it comes to ESG ratings or addressing ESG issues? Have they been improving, or are they demonstrating a competitive advantage through sustainability goals and practices? This approach includes what is sometimes called ESG Best-in-Class or Positive Screening based on ESG ratings.
- Does the company’s products, services, or behaviors support or deviate from the UN’s Sustainable Development Goals? This helps you assess the impact of your investments, as impact assessments undoubtedly affect the longevity or sustainability of a business, especially as regulatory guidance and legislation focuses more on ESG and sustainability.
While the number of funds promoting sustainability as a central theme continues to grow, sustainability themes also play a supporting role to a number of funds, usually by minimizing risks or practicing active ownership since asset managers are often shareholders in public companies – driving them to target sustainability themes or adapt or enhance business based on their ESG ratings, or impact assessment. Funds for which sustainability plays a leading role often combine several, or even all, of these approaches.
You can evaluate how much exposure you have to each approach and target exposure according to your preference and profile, or consult your financial adviser for assistance on finding the right investments to get you started on a sustainable investing portfolio, whether it’s looking at your current investments to exclude certain issuers and funds, or to add more of those in line with your sustainable investing goals.
by Benjamin Sharvell
NEBA Wealth Management
www.benjaminsharvell.com
