What is Sustainable Investing?

Sustainable investing is when investors aim to achieve financial returns while promoting long-term social or environmental value. They invest in companies based on environmental, social, and governance (ESG) criteria, collectively known as environmental social and governance factors. This is:

• environmental
• social
• governance (corporate management)

They don’t just practice sustainable investing on short-term gains but rather on the big picture and how they contribute to society.

Investors think about the company’s ESG before investing.

Why do Sustainable Investing?

There are many reasons investors are interested in sustainable investing. These include:

• personal values
• personal goals
• institutional mission
• client demands
• constituents or plan participants

These motivations often lead investors to adopt various sustainable investing strategies to align their financial goals with their values. Investors seek strong financial performance but also want to contribute to advancements in ESG. They often look for investments in community development loan funds and clean tech portfolios. Besides, ESG investors have labeled sustainable investing by different names. They include:

• community investing
• ethical investing
• green investing
• mission-related investing
• socially responsible investing
• values-based investing
• responsible investing
• impact investing

Sustainable investing has become popular due to millennial demand. It encourages companies to embrace sustainable principles, which can provide long-term social and financial gains.

Criteria for ESG Companies

The scoring is said to be somewhat subjective, but it is used to determine ESG or sustainable companies. ESG determination is the main factor in determining a sustainable company.

Registered investment companies, such as mutual funds and ETFs, often use these ESG criteria to evaluate potential investments.

The first is environmental impact and encompasses:

• carbon footprint
• waste
• water use
• conservation

It also includes the clean technology it uses and creates in its supply chain. In other words, the suppliers it uses for the products or services also must adhere to ESG.

Social is the company’s impact on society. It’s judged on how it advocates for social good and change. For instance, judgments are made on its involvement and stances on social issues like:

• human rights
• racial diversity
• hiring and inclusion programs
• employees’ health and safety
• community

Governance encompasses reviewing the quality of its management. It looks examines:

• executive compensation
• management and board
• diversity
• shareholder rights
• overall transparency and disclosure
• anti-corruption
• corporate political contributions

It is an exchange-traded fund (ETF) or company that is governed or managed for positive change.

Sustainable Investment Strategies

All sustainable initiatives share the same goals, but not all investors have the same motivations. Investors can leverage strategies when investing in ESG companies. First, they must determine what to invest in. Companies break potential sustainability into two categories.

In addition to traditional equity, sustainable investing can also be applied to alternative investments such as private equity and hedge funds.

One is Negative/exclusionary screening. The investor examines:

• specific sectors
• practices from a fund
• portfolio

Based on these three criteria, the company can be excluded as a sustainable company. It comes down to ESG. If a company doesn’t have it, it’s excluded.

Positive/best-in-class screening encompasses investments in sectors, companies or projects that are selected from a defined universe for positive ESG performance compared to industry peers.

The scoring is said to be somewhat subjective but is used in determining ESG or sustainable companies.

Activist and Impact Investing

There are two types of investing. One is buying equity in a company to change its operations.

With activist investing, investors make decisions based on moral values or causes. They look for companies and their leaders who care deeply about these values.

For example, those investors who care about global warming may invest in companies that drive environmental change.

Impact investing targets investments that are focused on solving environmental and social problems. One example is community investing, in which capital is directed to traditionally underserved communities. They also want businesses that have a clear social or environmental purpose.

Venture capital is another form of impact investing, where investors fund startups and early-stage companies that aim to generate social and environmental benefits.

In the past, impact investing was for private or individual investors and was referred to as a private market strategy. But now, public market funds that call themselves impact investors.

Choosing Sustainable Investments

There are several ways to choose a sustainable investment. Some require research, while others look to help. Investors can also consider sustainable investment funds, which are designed to achieve both financial returns and positive societal impacts. Here are a few.

Research for ESG Companies

Many analysts and various organizations publish lists yearly that give you the best ESG stocks. This could help you identify investments that align with your strategies.

Closed-end funds are another option, as they can incorporate ESG criteria into their investment strategies.

Opting for funds is also a strategy. You can find ESG funds from brokerages. Just search for “ESG” in their screening tools.

Guided Strategy to Find ESG Companies

If you want to go with a less do-it-yourself approach, consider robo-advisors. Many offer sustainable investment portfolios. You must understand that ESG guidelines vary among advisors. You might also have a fee for automated investing.

Talk to a Financial Advisor

The last strategy for choosing sustainable investments is to work with an ESG financial advisor. They will consider and incorporate your entire financial portfolio into your investment accounts. That way, your personal goals will be achieved.

A financial advisor might be a more expensive strategy for choosing a sustainable investment, but you'll benefit from having a tailored investment plan and a professional managing your investments.

Investors’ Concerns

Globally, 77 percent of individual investors say they are interested in investing in companies that are focused on achieving market-rate financial returns while also participating in a social or environmental agenda. Here's how some potential investments broke down.

Only 15 percent of investors of those polled by Morgan Stanley were planning on investing in climate focused businesses. While 13 percent were aiming for healthcare business, and 11 percent were concerned about water solutions. The rest, who were interested in investing in ESG companies, broke down into single-digit investing goals some of which included:

• community development – 5%
• financial inclusion – 7%
• nature and biodiversity – 8%
• education – 8%
• multicultural diversity – 5%

Sixty-seven percent of those interested in sustainable investing had concerns about a lack of transparency and trust in reporting data, while 68 percent were concerned about "greenwashing." Greenwashing occurs when the company's authenticity is questioned, and doubts arise about whether the company is green.

Who Invests in Sustainable Investments?

There are many types of sustainable investments, and hundreds of investment management firms offer vehicles for their investors.

Sustainable investors can be found throughout the U.S. There are many examples.

Individuals Invest

Many people invest as part of their savings or retirement plans. There are some mutual funds that specialize in seeking ESG companies. They are particularly interested in good labor and environmental practices.

Credit Unions

Some credit unions and community banks have a specific mission to serve low- and middle-income communities. These financial institutions are looking for community development and financial inclusion.

Religious Institutions, Foundations and Hospitals

Some religious institutions file shareholder resolutions to urge companies with portfolios to meet strong ethical and governance standards. They want employees to be treated well and managers and boards to elicit ethical behavior.

Many hospitals and medical schools refuse to include tobacco manufacturers in their portfolios. Foundations prefer community development loans. They like high-social-impact investments.

Venture Capitalists and Property Funds

Venture capitalists often become interested in sustainable investments. They identify and help companies that produce environmental services.

Private equity is also a significant component of sustainable investing, as it allows investors to support companies that align with their ESG criteria.

Some responsible property funds will retrofit or develop residential buildings to high energy efficiency standards. They also create or bring up-to-grade commercial buildings.

Public Pension Plans

Your 401 (k) funds could be invested in an ESG company. Not only are they invested in them, but plan officials encourage other companies where they invest to reduce their greenhouse gas emissions. They want these companies to factor climate change into their decisions.

Variable annuity funds are another option for public pension plans, as they can incorporate ESG criteria into their investment decisions.

Sustainable Investing Future

Sustainable investing is bound to grow in popularity. Investors are becoming more attuned to how they further or hinder the causes people care about.

Studies have shown that sustainable investment funds perform on par with or even better than traditional investments, making them a viable option for future growth.

Because of this, companies that want to attract investors will be pressured to improve their ESG scores.