Have you ever thought about investing well while doing so prudently? Sustainable Investing serves as a catch-all term for just that. The phrase embodies a variety of approaches that likely mean different things to different people. It is not an asset class or strategy, and the appropriate implementation method is not the same for all investors. Despite its rapid growth in recent years, the terminology used when referring to sustainable and environmental, social, and governance (ESG) investing remains ambiguous. Whether your focus is ESG Investing, Impact Investing, Socially Responsible Investing, or another facet, investing capital to bring about positive change, both financial and non-financial, remains the ultimate goal.
The outset of sustainable investing dates to at least the early 1700s, with religious organizations excluding investments based on faith-influenced values. Typically categorized as Socially Responsible Investing or Values-Based Investing, these types of strategies use negative screens to remove or avoid particular companies and industries based on the investor’s preferences and biases. Fast forward to the late 1960s, positive screens and Impact Investing take hold as investors look to generate environmental and/or social impact alongside financial returns. Investors contributed to causes such as women’s rights, civil rights, and the anti-war movement as social investing became more mainstream. A strategy utilizing positive screening is implemented by investing in companies or projects that are considered “best-in-class” on specific ESG issue areas when compared to their peers. These can include factors such as water pollution and carbon emissions (E), gender and diversity of the workforce (S), and a company’s board composition (G). It can also be applied to companies that may not currently meet those standards but are working to improve their practices. For this, consider an oil company, traditionally viewed as destructive or dirty, that is transitioning their business to focus more on renewable forms of energy. The launch of the United Nations Principles for Responsible Investment (PRI) in 2006 further formalized the sustainable investing movement. The PRI represents an independent, global alliance of asset owners, investment managers, and service providers committed to responsible investment. The group set forth six voluntary and aspirational investment principles that offer possible actions for incorporating ESG standards into investment practice.
Asset growth in the space reflects increased interest from investors around the world. As of December 31, 2018, the Global Sustainable Investment Alliance (GSIA) reported $30.7 trillion of sustainably managed assets globally1. As of the year ending 2020, assets employing ESG type strategies account for nearly a third, $17 trillion, of all US-domiciled professionally managed assets2. Although interest and participation continue to grow, sustainable investing strategies are not currently implementable to each investor’s standards or causes. One challenge the industry is working through in order to make sustainable investing more easily accessible is the availability, quality, and consistency of ESG-related data. Increased regulation and disclosure requirements, such as those put forth by the Task Force on Climate-related Financial Disclosures and the CDP (formerly the Carbon Disclosure Project), have shifted the landscape in favor of increased transparency across the board. There are currently more than 11,500 companies worldwide that disclose ESG-related indicators and metrics3, and over 125 organizations produce research and ratings on companies based on that data4. Despite the abundance of publicly available data, the lack of standardization in rating methodologies and reporting guidelines often leads to difficulties in determining which metrics are most material to investors and how companies stack up. We delve deeper into the inconsistencies in ESG-related data, reporting, and scoring in our upcoming iQubed article, but rest assured, the data quality and analysis consistency continues to improve.
As the sustainable investing landscape continues to evolve, it is understandable for investors, individuals, and institutions alike to rely on a knowledgeable advisor to navigate the complexities within. Individuals can align their investments with their personal beliefs. Institutional investors acting in the best interest of the organizations they represent can work to integrate the mission of the organization with its investable assets. Opportunities to invest well while doing so prudently exist for those eager to join the movement.
GSIA 2018 Trends Report
US SIF 2020 Trends Report
Bender, Sun, and Wang, 2017
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