Sustainability is an emerging global business trend. As CEOs and boards of directors adopt it, institutional investors must lead its implementation by allocating large amounts of capital to its cause. In fact, investors funneled nearly $70 billion in 2021 into funds related to sustainability.
This is an example of sustainable investing, or seeking investment opportunities based on their financial returns and overall influence on environmental and social issues. More investors are searching for these opportunities due to shifting consumer motivations.
Millennials have become a powerful market influence in recent years. According to a survey conducted by The Harris Poll, 76 percent of older millennials believe climate change poses a serious threat to society. Additionally, about one-third of millennials typically invest based on environmental, social, and governance (ESG) scores and factors.
Whether you plan to pursue sustainable investing personally or professionally, it’s important to educate yourself on the industry’s specifics. Here are five essential sustainable investing skills you should develop to make a global impact.
Sustainable Investing Skills That Promote Impact
1. Selecting an Investment Strategy That Aligns with Your Organization’s Goals
Successful investment strategies must align with your company’s goals. This is especially important for sustainability-focused strategies. A major difference is how you identify those goals.
For example, companies not focused on sustainability often identify organizational goals based on profit margins. Alternatively, sustainable businesses use different metrics to establish objectives. This is calculated with ESG factors that are incorporated into their sustainability strategies.
Understanding how to incorporate ESG factors into investment decisions is crucial to defining and managing an investment strategy’s success. There are four types of ESG investing strategies financial leaders should be aware of to align with stakeholders' goals:
- Screening: Including or excluding certain companies from sustainable investing portfolios according to their ESG factor scores
- Impact investing: Valuing an investment’s positive social and environmental outcomes above financial returns in the private market
- ESG integration: Analyzing ESG factors and risks to determine how they’ll influence organizational decision-making
- Investment stewardship: Using shareholder power to influence investment strategies focused on sustainability
2. Knowing the Purpose of Your Investments
A global shift to business sustainability has led to changes in the investment sector. Many investors are starting to consider the “why” behind their decisions. While investments are meant to produce returns, profit can’t be the only goal in sustainable investing.
Consider your motivations behind allocating capital to a venture. ESG factors are an excellent metric for crafting an investment strategy, but serious investors are seeking purpose-led brands with a long-term impact on the market.
“If you’re able to link your purpose to the strategic vision of the company in a way that really gets people aligned and facing in the right direction, then you have the possibility of outperforming your competitors,” says Harvard Business School Professor Rebecca Henderson in a recorded Facebook Live lecture.
Thoroughly research companies based on their goals and past actions. Investigating traditional resources, like the standard index fund, won’t give you insight into your investment’s purpose. Organizations that reflect your company’s vision and values can help create a meaningful, robust portfolio.
3. Practicing Forward-Thinking
Business is fast-paced and competitive, and your organization needs to be adaptable and agile to take advantage of new opportunities. It’s best to be proactive, not reactive. With so many interesting and innovative ideas regarding finance strategies and tactics, financial stakeholders must be creative to produce long-term financial and social impact.
To get ahead of the curve, stay up-to-date on current challenges the world faces. According to the Harvard Business Review, trends that offer insight into the future of sustainability in business are:
- The growing support for sustainability from younger generations
- A call for more industry standards and regulations
- A rise in corporate partnerships to solve global problems
Related: What Does “Sustainability” Mean in Business?
4. Understanding and Navigating the Industry Landscape
Sustainable investing has become a popular financial practice. Yet, like most methods, it’s subject to change over time. Understanding the industry landscape is essential to a company’s long-term success.
One recent evolution in sustainability is the shifting standards of what constitutes a “green” company. For decades, businesses have been praised for being slightly more environmentally friendly than competitors. But, with sustainability’s growing popularity, companies are subject to far more scrutiny.
Mediocre environmental initiatives aren’t tolerated in today’s global market. As a result, companies are expected to be transparent and accountable about their operations’ impact on the world. They must avoid falling prey to impact washing.
Impact washing involves overstating or falsely claiming a product or service’s benefits to increase sales or profits. It’s an enticing practice for businesses that feel growing pressure to make a global impact, but it can hurt their brand. A common place you’ll find impact washing is in marketing materials advertising a high ESG score.
5. Measuring and Accounting for Impact
Unlike the clearly defined metrics in finance’s accounting sector, measuring a sustainable investment’s impact isn’t straightforward. There aren’t traditional line items in a financial statement reflecting initiatives’ successes or failures.
How can you determine your sustainable investment strategy’s efficacy? First, find a way to integrate impact measurement into an investment’s management.
Many companies use the triple bottom line method to evaluate investments’ social and environmental impact. The metrics that this concept considers are:
- Profit: Financial return generated for shareholders
- People: Commitment to non-stakeholders
- Planet: Efforts to reduce a carbon footprint and other environmental dangers
Once this data has been captured, it’s up to the investor, investment manager, or investees to articulate findings and how they relate to organizational goals. From there, a company can assess its return on sustainable investments.
Start Managing Impact Investments
There are several schools of thought on sustainable investing. Financial leaders should be aware of these when crafting their perspectives on sustainability in business. By taking a course that offers insights, frameworks, and skills to evaluate ESG factors, you can learn how to implement and manage impact investments on any scale.
Want to learn more about sustainable investing and the skills needed to make a positive global impact? Explore our six-week online course Sustainable Investing—one of our Business in Society courses—to position yourself as a global financial leader.
