Sustainable investment has begun to gather momentum. As awareness of social responsibility increases, more investors are adopting sustainable investments in their portfolio. Investors are no longer solely seeking profits but also looking to ensure that their investments positively impact society. Investments can both be sustainable and rewarding, and in this article, we will analyse the strategies to achieve sustainable investing.
The following are the questions we will look into:
Sustainable investing focuses on the impact and benefits of the investment on society rather than profit. Although profit is not completely excluded, it is secondary to sustainability. The investor can attain it by avoiding investing in certain industries or investing in sectors that align with your goals. As opposed to the general notion that sustainable investing generates lower returns, newer studies are confirming otherwise. According to a study done by Morningstar, in 2020 alone, sustainable investment performed significantly better than other funds on average.
With growing traction, corporations are being more transparent about their governance so that investors can make informed decisions on investment. However, just because the corporation is announcing to adhere to corporate social responsibility does not mean that they necessarily follow through.
Investors can achieve sustainable investment by avoiding certain industries, like tobacco, alcohol or gambling. With stocks, it is easier to pick and choose, unlike funds due to their reliance on benchmarks. However, some funds themselves avoid including stocks of certain sectors to appeal more to investors (e.g. some ETFs ignore fossil fuel reserve companies). Overall, responsible investing is popular and is growing both in Europe and the US and many institutions and groups are advocating for it to be included in their financial products. Some of those groups are in the following:
Citizens have the power to bring change in their country and not just through direct actions, but also through investments. As such, pensions are also investments and these investments are made in corporations, some of which does not sit well in the moral conscience. Many citizens have urged their states to implement laws that regulate corporate behaviour, ensure both consumer and employee rights and protect environmental rights. A good example of such is the Norweigian pension fund that bars risky investments and forbids contributing to acts that violate both human and environmental rights. The United Kingdom did something similar regarding their pension funds when they were forced to pull their investments out of the arms company.
Shareholders can also put effort to change corporate behaviour for the better. Such efforts can be raising awareness of concerns in the board room where their votes count. Shareholders who care about the social and environmental factors can start conversations about how the company behaviour can positively impact their stakeholders.
Another form of shareholder activism comes from investor relations firms, where the firms facilitate shareholder activism in an organised manner. Since investor relation firms are more knowledgeable about the corporate world, their aid effectively brings fruition to the cause.
One can also include shareholder engagement as part of shareholder activism as such that it is not as intensive as the latter. Rather, it requires minimal effort where the shareholders provide feedback on improving the company social responsibilities.
A community, as a whole, can also participate in the financial world through investing. Here, the community will come together to invest in community-based projects that benefit the group as a whole. Many institutions lend to communities that otherwise cannot receive financial aid through traditional financial institutions. Community-based investments could be creating small businesses, solving housing problems, fixing their infrastructure and improve education. Rather than buying stocks for personal growth, individual investors can positively impact their community by investing in community projects.
There is no single way to invest responsibly. Various criteria need to be checked out to measure the efficacy of sustainable investment. Some of the most common known strategies of sustainable investments are:
Environmental, social and governance (ESG)
ESG is a measurable criterion for investors that evaluate whether their investment is a sustainable one. It factors three conditions to comply with, whether his investments are with corporations that cause environmental harm (e.g. carbon emissions or water pollutions), social harm (e.g. neglects worker's rights and benefits and harms community development) and abused governance (engaging in corruption). Many corporations have integrated ESG into their responsible investment programs. Microsoft, for one, has committed itself to social goals to attain sustainability. Investors can look at their practices to make an informed decision about investing. While stocks are easier to evaluate through ESG, many funds are available that are specific on their benchmark for achieving social and green investments. There are ETFs in green projects, bonds that are geared towards community development and companies that focus on community development.
Exclusionary investing means screening out specific industries from their investment portfolio. For example, an investor can exclude tobacco-related funds and stocks from their portfolio. Opinion on this strategy is divided. On the one hand, many investors do not recommend exclusionary investing because of its historical smaller returns and hurting the overall portfolio in general. On the other hand, proponents of this strategy believe that such exclusion will force companies to protect their stakeholders. However, many financial economists have found no evidence between socially responsible investing and better financial performance.
Contrary to exclusionary investing, where the investor screens out sectors, in positive investing, the investor actively invests in companies that has a positive social impact. This strategy factors the company's social and environmental impact and the company's growth sustainability itself. For example, investing in an oil and gas company if the company is actively trying to reduce carbon emission by using the profits for green energy projects. This way, it does not sacrifice the whole portfolio diversification or long term performance. A 2015 study conducted by Morgan Stanley found that "strong sustainability" investments did better than the weaker ones.
Impact investing is another method of positive investing. Impact investing refers to those that focus on specific social agendas alongside financial returns. It focuses on companies that have an actual social impact rather than making philanthropic donations. Such corporations may be working directly in the sectors to uplift sustainable causes. A good example is clean technology companies, community development institutions and microfinance. Investors are participating in sustainability actively by investing in these organisations.
Conventional investments focus on traditional risks and returns. It does not focus on their impact on their stakeholders who are affected by their activities. The sustainable investment focuses on the social aspects alongside generic risks and returns. Some studies concluded that it is possible for a portfolio to achieve good financial performance without sacrificing the investor's conscience. Other studies found that the results are not so significantly different from conventional investments. Therefore, the battle between sustainable investing and conventional investment is still ongoing.
Last update: 12/08/2021