corporate governance (ESG) insights, investors are able to generate more comprehensive analyses and make better-informed decisions.
Sustainable investing ensures that firms are evaluated not just on short-term financial performance, but on a broader assessment of how they contribute to society. Investors must think critically about the potential impacts of their investments as they relate to environmental, political, and societal landscapes.
Sustainable Investing Strategies
While most sustainable initiatives share common end goals, not all investors are driven by the same motivations. Consequently, there are several strategies business leaders can leverage when investing sustainably, including:
Negative/exclusionary screening: Excludes specific sectors, companies, or practices from a fund or portfolio based on ESG criteria.
Positive/best-in-class screening: Encompasses investments in sectors, companies, or projects selected from a defined universe for superior ESG performance compared to industry peers.
An investment’s sustainability impact is evaluated using ESG factors. Here is a breakdown of what an ESG score typically consists of:
Environmental: A company’s impact on the environment, such as its carbon footprint, waste management, water usage and conservation, and the clean technology it utilizes and creates within its supply chain.
Social: A company or fund’s impact on society and its advocacy for social good and progress. Analysts closely examine its involvement in and stances on social issues, such as human rights, racial diversity in hiring and inclusion programs, employee health and safety, and community engagement.
Governance: How an exchange-traded fund (ETF) or company is managed or “governed” to drive positive change. It involves reviewing the quality of its management and board, executive compensation and diversity, shareholder rights, overall transparency and disclosure, anti-corruption measures, and corporate political contributions.
ESG factors are a significant consideration in sustainable investing, but there are additional strategies investors can employ:
Activist investing: Purchasing equity in a company with the goal of changing how it operates. Investment decisions are based on moral values or causes that companies and their leaders prioritize. For example, individuals deeply concerned about global warming may invest in a company that drives environmental change.
Impact investing: Targeted investments aimed at solving social or environmental problems. It includes community investing, where capital is directed toward traditionally underserved individuals or communities and financing is provided to businesses with clear social or environmental purposes. While impact investing is traditionally viewed as a private market strategy, there are now public market funds that identify as impact investors.
Why Is Sustainable Investing Important?
Sustainable investing has grown in popularity due to demand from millennials and impact investors focused on ethical investing—or funding companies with intrinsic values that generate a positive impact and drive change.
Sustainable investing encourages companies to adopt sustainable principles, which can provide long-term social and financial gains. This concept is embodied in the triple bottom line, or the idea that organizations should measure their social and environmental impacts in addition to focusing on financial performance and profit generation.
Encouraging businesses to adopt sustainability promotes the growth of purpose-driven firms that create social and environmental impacts beyond merely selling goods or services. Furthermore, large-scale global issues, such as climate change, are often addressed through sustainable business strategies.
It is important to become familiar with sustainable investing practices so you can determine where, and if, to invest based on your personal values and market trends. For example, as companies face increasing pressure to be sustainable, some investors are encountering greater demands from asset owners to prioritize sustainability.
Investing sustainably does not mean you must sacrifice financial returns. While it is impossible to guarantee returns, ESG funds and investments can perform as well as, if not better than, non-ESG funds. In 2020, 14 of 17 ESG-focused ETFs outperformed the S&P 500.
