Sustainable investing is about delivering results for today without compromising the world of tomorrow.
With sustainable investing, investors aim to achieve financial returns while promoting long-term environmental or social value. Unlike other more traditional investments, it ensures firms aren’t judged solely on short-term financial gains but on broader criteria of how they contribute to society.
Sustainable investing strategies go through a screening process to exclude specific sectors and companies which are detrimental to the environment and society. They also make a conscious effort to include those that make a positive difference. This investment process encourages investors to think critically about the potential impact their investments may have from an environmental and societal perspective. A portfolio’s sustainability impact is evaluated using ESG factors:
This is the part of the investment process which reviews the company or fund’s impact on the environment. Analysts will examine criteria such as the size of their carbon footprint, whether they produce greenhouse gas emissions and if they cause any deforestation. They will also look at resource depletion factors including water, waste and pollution.
Positive environmental impact will also be analysed in this process and if criteria are met, these companies or funds will be selected to make up the portfolio. For example, this could include if there are sufficient commitments to recycling and the use of clean technology in supply chains.
The sustainable investing process also reviews a company or fund’s impact on society and how it advocates for positive societal change. Analysts closely examine its involvement and stance on social issues such as the funding of global conflict and working conditions for employees. This can also include human slavery and child labour, the impact on local and indigenous communities and human rights violations.
Analysts will seek out companies to include in ESG portfolios which promote ethical and socially conscious business practices such as strong diversity and inclusion in management boards and teams, positive employee wellbeing and local volunteering commitments.
Finally, analysts will review how a company or fund is managed or “governed” for driving positive change. This review encompasses the quality of management teams, scrutinising areas like executive pay, bribery, corruption, tax payment, political lobbying and donations, board structure and diversity.
Is sustainable investing for me?
There are many sustainable investment solutions out there for investors, with scope to select the right funds that align with individual needs, values and objectives.
In a cost-of-living crisis, with rising interest rates and high inflation, investors may often want to prioritise financial returns over their ethics, putting sustainable investing on the backburner. However, if we are to meet society’s goals for a sustainable economy, supporters of this aim will want to show how sustainable investing can also be seen as a long-term value driver rather than just a “nice to have” option in economic fair weather.
Encouraging companies and funds to adopt more sustainable practices can create a demand for purpose-driven businesses that are improving society and managing their environmental impact. As this demand grows, global issues such as climate change are more likely to be addressed and steps taken to protect our planet for the next generation.
If you would like to discuss how to incorporate sustainable investing into your financial plan, please get in touch.