Investors can use several strategies to build and diversify their portfolios to ensure financial success. One emerging trend changing the way businesses and investors think about investing is a concept known as sustainable investing.
Sustainable investing has helped shape the world by contributing to positive social change. It’s also proven that individuals and businesses can financially benefit by making their investments more sustainable. By solidifying sustainable business strategies, purpose-driven leaders and organizations can thrive as they solve the world’s biggest challenges.
Here’s an overview of what sustainable investing is, what it means for companies and investors, and how it can help improve your portfolio and the world.
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Sustainable investing refers to a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social value. Combining traditional investment approaches with environmental, social, and corporate governance (ESG) insights has led to investors generating more comprehensive analyses and making better investment decisions.
Sustainable investing ensures firms aren’t judged solely on short-term financial gains but on a broader picture of what and how they contribute to society. Investors must think critically about investments’ potential impacts as they relate to environmental, political, and societal landscapes.
Sustainable Investing Strategies
While most sustainable initiatives share the same end goals, not all investors share the same motivations. Therefore, 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 positive ESG performance compared to industry peers
An investment’s sustainability impact is evaluated using ESG factors. Here’s a breakdown of what an ESG score typically consists of:
- Environmental: A company’s impact on the environment, such as its carbon footprint, waste, water use and conservation, and the clean technology it uses and creates in its supply chain.
- Social: A company or fund’s impact on society and how it advocates for social good and change. Analysts closely examine its involvement and stances on social issues, such as human rights, racial diversity within hiring and inclusion programs, employees’ health and safety, and community engagement.
- Governance: How an exchange-traded fund (ETF) or company is managed or “governed” for driving positive change. It encompasses reviewing the quality of its management and board, executive compensation and diversity, shareholder rights, overall transparency and disclosure, anti-corruption, and corporate political contributions.
ESG factors are a significant consideration in sustainable investing, but there are additional strategies investors can use:
- Activist investing: Buying equity in a company for the purpose of changing how it operates. Investment decisions are based on moral values or causes that companies and their leaders care deeply about. For example, individuals who strongly care 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 to traditionally underserved individuals or communities and financing is provided to businesses with clear social or environmental purposes. While impact investing is traditionally referred to as a private market strategy, there are now public market funds that identify as impact investors.
Why Is Sustainable Investing Important?
Sustainable investing has become increasingly popular due to demand from millennials and impact investors concerned with ethical investing—or funding companies with intrinsic values that make a positive impact and drive change.
Sustainable investing encourages companies to embrace sustainable principles, which can provide long-term social and financial gains. This concept is embodied in the triple bottom line or the idea that, in addition to focusing on financial performance and generating profit, organizations should measure their social and environmental impacts.
Encouraging businesses to adopt sustainability promotes the existence of purpose-driven firms that make social and environmental impacts that go beyond selling goods or services. Furthermore, large-scale global issues, such as climate change, are often solved with sustainable business strategies.
It’s important to become familiar with sustainable investing practices so you can determine where, and if, to invest based on your values and investing trends. For example, as companies are increasingly encouraged to be sustainable, some investors face increased pressure from asset owners to focus more on sustainability.
Investing sustainably doesn’t mean you must forfeit financial returns. While it’s impossible to guarantee returns, ESG funds and investments can perform as well, if not better, than non-ESG funds. In 2020, 14 of 17 ESG-focused ETFs outperformed the S&P 500 from January to May. Meanwhile, according to financial services firm Morningstar, 23 new ESG funds launched in 2020, providing investors with more sustainable choices and indirectly encouraging companies to reevaluate their ESG scores to be included.
Selecting Sustainable Investments
If you want to make ESG-based investments, you must first do some research.
To get started, many analysts and organizations publish annual “best of” lists for top-rated ESG stocks, which can help identify investments that fit your strategy. You can also opt for funds to avoid choosing 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 do-it-yourself investing approach, consider robo-advisors that offer sustainable investment portfolios. Be aware that ESG guidelines vary between advisors, and fees can be associated with automated investing.
An alternative strategy is to work with an ESG financial advisor, who considers and incorporates 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 further or hinder the causes they care about, sustainable investing is likely to grow in popularity. Likewise, organizations that want to attract investment dollars and positive press coverage 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 concerned with sustainability, completing an online course focused on sustainable investing can be an efficient means of quickly gaining the knowledge and skills you need for success.
Are you interested in exploring the intersection of investment and impact? Explore Sustainable Investing, one of our online Business in Society courses, and discover how you can apply frameworks to measure and monitor sustainable investment opportunities. Do you want to build your financial fluency? Download our free Financial Terms Cheat Sheet.
This article was updated on July 14, 2022. It was originally published on May 27, 2021.
