Investors can use several different strategies to build and diversify their portfolios to ensure financial success. Yet, one emerging trend changing the way businesses and investors think about investing is a concept known as sustainable investing.
Sustainable investing is not only helping shape the world by contributing to positive social change, but it’s proven that both individuals and businesses can benefit financially by seeking to make their investments and companies more sustainable.
Below, you’ll learn what sustainable investing is, what it means for companies and investors, and how it can help you improve both your portfolio and the world.
What Is Sustainable Investing?
Sustainable investing, also called socially responsible investing or ESG investing, is a means of investing in which an investor strongly considers environmental, social, and corporate governance (ESG) factors before contributing money and resources to a particular company or venture. The goal is to, whenever possible, use investment dollars to promote positive societal impact, corporate responsibility, and long-term financial return.
Sustainable investing ensures that firms aren’t judged solely on short-term financial gains but on a broader picture of what and how they contribute to society at large.
Why Is Sustainable Investing Important?
Sustainable investing has become increasingly popular, especially due to demand from millennials and impact investors who prefer to invest in companies with intrinsic values that drive positive change.
Sustainable investing encourages companies to embrace sustainable principles, which can provide social and financial gains long-term. This concept is embodied well in the idea of the triple bottom line.
It’s important to become familiar with sustainable investing practices, so you can determine where—and if—you want to invest based on your values and investing trends. Some investors, for example, are facing increased pressure by asset owners to focus on sustainability, just as companies are being encouraged to become more sustainable.
Sustainable investing doesn’t necessarily mean that you must forfeit financial returns. While it’s impossible to guarantee returns, ESG funds and investments can perform just as well, or better, as non-ESG funds. In 2020, 14 of 17 ESG-focused exchange-traded funds (ETFs) outperformed the S&P 500 from January to May. Meanwhile, according to Morningstar, 23 new ESG funds launched in the past year, providing investors with more sustainable choices and indirectly encouraging companies to reevaluate their ESG scores in order to be included.
Sustainable Investing Strategies
Several strategies can be pursued when it comes to investing sustainably.
You might specifically avoid investing in companies or industries you know conflict with your moral values or causes you care about deeply. For example, individuals who care strongly about global warming may choose not to invest in oil and gas companies, while those concerned with health may choose not to invest in tobacco companies.
Alternatively, you can actively seek out companies and industries that do align with your values. Individuals concerned with global warming may instead choose to invest in the clean energy sector.
While individual investors may perform a basic initial analysis of companies, professional analysts or fund managers will often rate stocks, exchange-traded funds (ETFs), and mutual funds by their ESG scores. This number provides a quick snapshot to see where a potential investment stands on sustainability issues.
ESG Factors
An investment’s sustainability impact is evaluated using environmental, social, and governance (ESG) factors. Here’s a breakdown of what an ESG score typically consists of:
1. Environmental
This category considers the impact a company has on the environment, such as its carbon footprint, waste, water use and conservation, and clean technology it uses and creates in its supply chain.
2. Social
This refers to the social impact an individual company or fund has within society and how it advocates for social good and change within the broader community. Analysts look closely at a company’s involvement and stances on social issues such as human rights, racial diversity within hiring and inclusion programs, the health and safety of its employees and board members, and community engagement.
3. Governance
Governance deals with how an ETF or company is managed, or “governed,” for driving positive change. It encompasses reviewing the quality of management and the board, executive compensation and diversity, shareholder rights, overall transparency and disclosure, anti-corruption, and even corporate political contributions.
Selecting Sustainable Investments
If you’re looking to make some ESG-based investments, you’ll first need to do some research.
To get started, many analysts and organizations publish annual “best of” lists for top-rated ESG stocks, which can help you identify potential investments that fit your strategy. You can also opt for funds instead to avoid choosing your investments manually. It’s common to find ESG-centric funds from brokerages by searching “ESG” in their screening tools.
If you’d prefer a more guided and slightly less DIY investing approach, look into robo-advisors that offer sustainable investment portfolios. Just be aware that ESG guidelines can vary between advisors and that there can be fees associated with automated investing.
An alternative strategy is to work with an ESG financial advisor, who can consider and incorporate your entire financial portfolio and personal goals into your investment accounts. Although slightly more expensive, you might benefit from having tailored investment strategies and a professional managing your investments.
The Future of Sustainable Investing
As more investors become attuned to how their investment dollars can further or hinder the causes they care about, sustainable investing is likely to become increasingly popular. Likewise, organizations seeking to attract investment dollars and positive PR will be pressured to improve their ESG scores.
Whether you’re an individual investor who wants to make more informed decisions or a business leader within an organization or industry concerned with sustainability, completing an online course focused on sustainable business strategy can be an efficient means of quickly gaining the knowledge and skills you need for success.
Are you interested in learning how to lead your organization toward positive change? Explore Sustainable Business Strategy, one of our online Business in Society courses, and discover how you can become a purpose-driven leader.
