As the year winds down, we decided this month is the perfect time to revisit sustainable investing — an approach that’s revolutionizing how people think about wealth growth. By integrating ethical factors into financial decisions, sustainable investing allows you to have a positive impact on the world while also pursuing long-term financial returns.
It’s no surprise that ESG investing strategies are capturing the attention of both individual investors and large institutions, who see it as a smart and responsible way to continue growing money. Whether you’re new to the concept or looking to learn more, we’ll explore different approaches and strategies to sustainable investing.
ESG Investing
In recent years, ESG investing has seen significant growth. As of 2023, global sustainable investment assets surpassed $30 trillion, according to the Global Sustainable Investment Alliance. Our earlier analysis of Morgan Stanley’s 2023 report highlighted that, over the past five years, sustainable investments have consistently matched or exceeded the returns of conventional funds. Investors are increasingly focused on companies with strong sustainability practices, driving greater demand for ESG-compliant funds.
ESG integration is increasingly becoming a core element of traditional investment strategies rather than a standalone approach. It involves systematically evaluating ESG factors such as climate risk, resource usage, and labor practices that can influence a company’s financial performance. ESG integration doesn’t alter an investment strategy’s goals or limit the range of assets considered, but it helps investors assess how these factors might affect long-term returns. This approach is ideal for those who want to account for ESG risks without fully committing to sustainable investments.
If you’re new to ESG investing, it’s important to understand its underlying principles and how to assess investment opportunities. For a deeper dive into ESG investing, check out our Beginner’s Guide to ESG Investing.
Strategies for Sustainable Investing
Exclusionary Strategies were among the first to emerge in sustainable investing, often rooted in religious principles that prohibited certain investments like gambling or alcohol. Today, exclusionary approaches continue, with many funds restricting investments in industries such as weapons, tobacco, and fossil fuels. These exclusions may reflect international standards or personal values, providing a straightforward method for investors to avoid sectors that don’t align with their ethics.
Positive Tilt Strategies focus on increasing exposure to companies with higher ESG scores. Investors using this approach typically aim to maintain an overall portfolio ESG score above a certain threshold. The ESG scoring system can vary, with some asset managers using external providers, while others create their own in-house systems to assess companies’ sustainability practices.
Best-in-Class Strategies involve ranking companies within their sectors based on their sustainability practices and selecting the top performers. This allows investors to build a portfolio of ESG leaders, ensuring exposure to sectors with strong ESG practices without over-concentrating in one area.
Thematic Strategies are tailored to specific environmental or social goals, investing in companies whose products or services directly address issues like climate change or social inequality. These strategies target industries or solutions that contribute to positive environmental or social outcomes.
Impact Strategies go beyond financial returns, aiming to generate measurable social or environmental impact. These strategies are defined by clear impact goals and track specific metrics. For example, a climate-focused impact fund might measure its success by tracking reductions in greenhouse gas emissions resulting from its investments.
Is Sustainable Investing Right for You?
At EGÉA SRI, we believe that investing responsibly can lead to strong financial returns. Research continues to support this view: in a previous blog post, we examined trends and the global momentum that suggest sustainable investing is here to stay. If you’re intrigued by the idea of investing in a way that aligns with your values or even just want to review your investments before the year is over, we invite you to contact us for a consultation. Let us help you grow your portfolio – sustainably.
