Sustainable Investing
Sustainable investing is the practice of investing in companies and products that positively affect the environment, society and make an effort to address global challenges. More investors today are increasingly considering the environmental, social and governance (ESG) factors of a company, integrating them into their financial decisions. As a result, sustainable investing is broadening the scope of traditional investing and has become a catalyst for profitable investments and positive outcomes for companies, investors, and the world.
What is ESG Investing?
Environmental, social and governance investing is a type of investing that focuses on investing in companies and projects that take into consideration the triple bottom line of sustainability – financial, social and environmental outcomes. This type of investing looks beyond traditional financial criteria, such as a company’s return on investment (ROI), and applies specific criteria such as a company’s contribution to greenhouse emissions, sustainability initiatives, human resource policies and more. By doing this, investors can create portfolios that reflect their ethical values, support aligned companies and benefit from a range of positive outcomes.
The Rise of Sustainable Investing
Due to a growing global awareness of the impact of climate change, investors are becoming more indicative of how their money is spent. As of 2020, an estimated $7 trillion of professionally managed assets worldwide were being managed in accordance with ESG principles. According to a survey by Morgan Stanley, 88% of investors believe there is a “strong rationale” to incorporate ESG considerations into their portfolios, with 81% stating they see it as financially material.
Advantages of Sustainable Investing
Investors are turning to ESG investments for a variety of reasons. Here are some of the top advantages of ESG investing:
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Financial Returns: Many studies have shown that ESG investing can deliver competitive returns. BlackRock, found that companies with higher sustainability ratings consistently outperformed those rated lower.
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Improved Valuations: Companies with high ESG ratings often have higher valuations due to increased investor confidence and more attractive ratings from rating agencies.
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Increased Efficiency: Companies with strong sustainability practices are typically better managed and more efficient than those with weak practices.
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Risk Management: Companies with solid ESG practices are better equipped to manage environmental, social and governance risks.
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Stakeholder Engagement: Companies with strong ESG practices are better able to engage key stakeholders, including customers, employees and partners.
Types of Sustainable Investing Strategies
There are several ways to engage in sustainable investing, depending on the investor’s goals and desired outcomes. Here are some common ESG investing strategies:
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Impact Investing: Impact investing focuses on investing in companies or projects that actively seek to create positive, measurable and sustainable outcomes.
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Socially Responsible Investing: This form of investing incorporates ESG standards into the decision-making process when evaluating investments.
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Thematic Investing: This type of investing focuses on specific areas or industries, such as clean energy, renewable resource and global inequality.
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ESG Integrative Investing: Investors can use this strategy to evaluate the ESG ratings of traditional investments
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ESG Exclusionary Investing: An exclusionary strategy avoids investing in certain companies, industries and projects that do not meet ESG criteria.
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ESG Screening: This type of investing uses quantitative and qualitative ESG data to evaluate and invest in specific companies or industries.
Sustainable investing is an increasingly popular investment strategy due to the potential financial returns and positive social and environmental outcomes it can generate. By investing in companies and projects that actively seek to create positive, measurable and sustainable impacts, investors are playing a key role in ensuring a brighter, more sustainable future. As more investors look for ways to align their portfolios with their values, sustainable investing is one of the best options available.
