Sustainable Investing
Sustainable investing has risen in popularity among socially and environmentally conscious investors. “Sustainable Investing” is a term for investments that seek long-term returns and long-term impact on society, environment, and the performance of the business. They include Impact Investing, Socially Responsible Investing (SRI), also known as green and ethical investing, and Environmental, Social and Governance (ESG) Investing.
SRI excludes industries that negatively affect the environment and its people. This includes companies that produce or invest in alcohol, tobacco, gambling, and weapons. Both SRI and Impact Investing put money behind certain values. However, unlike SRI strategies that avoid certain industries, impact investment strategies are focused on companies that are doing something positive to solve the world’s environmental or social challenges. Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.*
ESG strategies put money in the companies that are carefully evaluated using ESG criteria – a set of standards for a company’s operations that investors use to screen potential investments. These thorough analyses include financial performance as well as environmental, social, and governance policies and practices. Environmental practices might include practices that reduce carbon emissions, land and water pollution or avoid animal mistreatment. Social impact could involve fair labor practices and improvements in workplace equality and diversity, the ways in which companies do business with other companies and the ways in which they impact the communities. Governance issues relate to a company's leadership structures, board composition, and management incentives. For example, an ESG-integrated fund will focus on companies that are paying attention to those areas, but that does not necessarily mean any companies are excluded. This means that, in some cases, investors might be surprised at what is included in an ESG fund. They might assume that controversial companies are excluded unless they carefully look at fund’s holdings.
Solutions to global challenges can be achieved with a critical mass of private capital. Social impact bonds are an example how private investors fund innovative approaches to social issues. These bonds are first pioneered by the UK in 2010 to help prevent reoffending among former prisoners. ** Today, some of the top social impact bonds include environment, social welfare, education and criminal justice sectors in the United States, the UK, Australia, and Finland.
As with any investment, investors should consider investment risks and how sustainable investing approaches might affect their overall investment plan.
Attitudes about sustainability have changed. Investors now make sustainability values a business issue as well as an ethical one. For these investors, it is important that sustainability is incorporated into businesses’ core values.
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* Global Impact Investing Network
** The Top Social Impact Bonds, Financial Times, December 3, 2018