In a world that is increasingly plagued by environmental concerns, individuals are looking for more ways to manage their own personal impact, even if at times it feels like the impact is frustratingly small. However, in recent years, investors have learned that where they allocate their funds can be an immensely effective way to advocate for sustainability and ethical practices on a larger scale. Although often overlooked as a less profitable and cumbersome alternative to traditional investing, Sustainable Investing is proving to be possible at a high level, extremely profitable, and environmentally impactful– and the basics of it aren’t as convoluted as you may think.
What is Sustainable Investing, and How Can You Do It Right?
As you may already know, Sustainable Investing addresses a company’s core values of environmental stewardship, social responsibility, and good governance, otherwise known as ESG. But despite the rising popularity and growth of sustainable portfolios, investors may hold back and continue to utilize traditional funds out of fear of unfounded claims and lack of security. How can each of these pillars be analyzed or validated in an understandable manner?
To answer this question, each concept can be broken down by various metrics and values that determine how well a company meets ESG standards. This can be helpful information, especially to avoid pouring your valuable earnings into entities that utilize greenwashing and false claims to sway investors. On the environmental side, companies report metrics like their carbon emissions, water usage, overall waste, and energy consumption. This aspect is balanced by the social and human rights pillar, which examines how ethically businesses treat their employees, indicated by metrics such as employment turnover and satisfaction, how the business interacts with their community, and what sort of safety policies are in place. Finally, to give the informed investor a sense of security and assurance, businesses that are in tune with ESG are transparent about their governance structure and business practices and explicitly outline the rights of their shareholders.
Combined together, these qualitative and quantitative aspects provide a glimpse into how well a company meets ESG standards. Organizations such as MSCI provide guidance based on these criteria to rate the sustainability of businesses. MSCI in particular uses a scale between CCC, for “laggard” performance, and AAA for industry leaders in ESG. Having a concrete and transparent framework in place gives investors the confidence they need to allocate a greater portion of their funds to a sustainable future.
Is Sustainable Investing Profitable?
A common misconception is that Sustainable Investing sacrifices significant profitability, which prevents investors from diving in further. However, upon closer inspection, this could not be farther from the truth. A 2015 study conducted by Oxford University analyzing over 200 industry reports concluded that, “88 percent of reviewed sources find that companies with robust sustainability practices demonstrate better operational performance, which ultimately translates into cash flows.” This is shown to directly translate into increased investment returns, especially recently. In the first half of this year, The Morgan Stanley Institute for Sustainable Investing reported that, between January 1, 2023 and June 30, 2023, sustainable funds out-returned traditional funds by +3.1%. Not only has sustainably oriented investing proven to be more profitable, but it also is less volatile and more robust than traditional investing– a preferable choice especially during the current bear market. The Morgan Stanley Institute for Sustainable Investing also examined data from more than 3,000 mutual funds and ETFs during the COVID-19 pandemic in 2020, and concluded that sustainable funds performed 4.3% better than their traditional counterparts during that time. Evidently, it is entirely possible to grow your money to achieve financial goals without sacrificing socially and environmentally ethical practices.
How to Keep Sustainable Investing Accountable
In addition to their desire to maximize ROI, those interested in Sustainable Investing may also express concern or doubt that their funds are not being allocated in a way that actually addresses complex, global challenges like climate change and biodiversity loss. Fortunately, in addition to the MSCI scale, sustainability reporting has come a long way, and there are strictly monitored standards in place to help professionals invest in a way that genuinely makes an impact. The transparency of environmental costs is becoming increasingly commonplace due to recent initiatives such as the formation of the International Sustainability Standards Board by the IFRS, which allows for a seamless flow of sustainability information and metrics from corporations to investors. This provides a clear incentive for businesses to constantly improve their ethical practices while giving investors the opportunity to know precisely how sustainable their portfolios are, both financially and environmentally.
Egéa Sustainable Investing
There’s no doubt that Sustainable is on the rise and here to stay. Staying informed on how to invest effectively and knowledgeably is critical for stockholders and stakeholders alike. At Egéa, helping professionals navigate sustainable investing is what we do. We want to help you build a portfolio that not only prioritizes your financial growth, but also demonstrates your values of environmental sustainability and social responsibility. Reach out to us today to see how we can assist you with the next step in your SRI journey!
This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results. All investments involve the risk of potential investment losses and no strategy can assure a profit.
