There is no doubt that interest in sustainable investments is growing.
Investors are increasingly interested in more than how much a company makes. They want to know how the company makes its money.
While some may focus on the longer-term viability of a company and its behaviour, others hold particular values they want their investments to mirror.
How these two strategies play out in the investments context can vary.
Sustainable investments: changing investors’ perception
Even at the highest level, investors are shifting from focusing on short-term returns to long-term value creation.
In his 2017 letter to the CEOs of the companies his firm invests in – Blackrock CEO, Larry Fink, highlighted this exact issue.
He noted that “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate”.
Investors are asking CEOs to focus on more than just shareholder value. They want a long-term vision for the company.
Sustainable investments: It’s not a new idea
Many investment managers use environmental, social and corporate governance (known collectively as ESG) knowledge and data. It informs the analysis of important areas like risk, innovation, engagement and voting practices.
- a company’s interaction with the environment, such as water and air pollution
- social factors like employee diversity or safety standards
- the company’s governance structure, such as how the board is composed and compensation structures.
This adds value and manages risks through broader, more comprehensive investment analysis and decision-making.
Sustainable investing opportunities
Navigating the world of responsible investment can be complex for investors.
Terms like ethical, sustainable and impact investing are used interchangeably by investors seeking to ensure that their money is invested in companies that mirror their values and beliefs.
These terms each relate to a specific type of responsible investing – depending on what the investment is trying to achieve.
Ethical investing verses sustainable investing
Arguably, the most well-known responsible investment strategy among investors is ethical investing.
This strategy’s primary purpose is to exclude certain industry sectors, companies, practices or even countries that meet specific criteria from a fund or portfolio. This is based largely on the client’s preference not to be invested in these activities.
Traditional ethical investment strategies seek to avoid issues like tobacco, weapons and gambling. However, investors are increasingly interested in strategies that avoid sectors linked to climate change or abuse of human rights.
Sustainable investing is a type of responsible investing that considers ESG issues in an investment, alongside standard financial measures when assessing a company’s performance.
This might include how a company approaches
- employee relations
- executive remuneration
- anti- money laundering legislation.
Sustainable investing also lends itself to longer-term investment horizons and strategies.
If more investors use a sustainable strategy in their investment decision-making, more companies will be encouraged to behave sustainably and address ESG concerns.
Impact investing – a rapidly developing field
You may have heard about the rapidly developing field of impact investing.
Impact investments preference the social or environmental purpose of an investment over or alongside its financial results.
Whilst there are few opportunities to access impact investments for most retail investors, many people are attracted to the idea of investments that aim to deliver a positive outcome as an alternative.
Source: BT, April 2019