What is Sustainable Investing?

Sustainable investing is about investing in progress, and recognising that companies solving the world’s biggest challenges can be best positioned to grow. It is about pioneering better ways of doing business, and creating the momentum to encourage more and more people to opt in to the future.

Over the last decade, sustainability has become increasingly important in the investment world. More and more investors now want to know where their money is going and what it is being used for. They believe it is important to know that their investments are comfortably aligned with their values.

In response, more and more governments, corporations and investors are adopting the principles of sustainable investing. In effect, increasing demand is driving the mass growth of these types of investments. There is now more than $21.4 trillion invested sustainably in global assets, with $13 trillion of this in Europe alone.

More than half of UK investors have increased their sustainable investments over the past five years. This includes over 85% of people aged 18 to 36, who consider sustainable investing as being important to them.

Definitions for sustainable investing, environmental, social and governance (ESG) investing, ethical investing, impact investing, socially responsible investing (SRI), values-based investing, conscious investing and green investing.

Sustainable investing is the aim to generate long-term financial returns while contributing positively to society. As well as sustainable investing, you will come across lots of other different terms. There is ethical investing, environmental, social and governance (ESG) investing, impact investing, socially responsible investing (SRI), values-based investing, conscious investing and green investing.

While they broadly mean the same, there are some key differences in the way they work which are important to know before you choose how to invest.

Sustainable investing is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.

Sustainable investing actively selects companies that have a positive impact on the world. This could be anything from green technology to social initiatives in developing countries/regions. It’s less restrictive than ethical investing as it allows for the fact that companies are often neither all good or all bad – such as oil companies that invest in clean energy.

ESG investing refers to a wide range of environmental, social and governance topics. It is commonly used interchangeably with the term “sustainability”. ESG is embedded within the businesses itself and has great importance in terms of sustainability of the business. Investors are increasingly considering these ESG factors in their investment decisions.

For instance, under the environmental pillar, while greenhouse gas emissions (and their impact on climate change) are the most common metrics reported – and climate change was a major theme at the World Economic Forum this year, investors might also want to know about how much electronic waste or packaging and material waste a company produces and how the company plans on reducing that waste.

From a social perspective, an example includes a company’s workforce diversity and inclusion policies. Investors want to know the percentage of gender and racial/ethnic group representation for management and all other employees.

In terms of governance, investors are paying greater attention to the risks and opportunities associated with business ethics, anti-corruption, systemic and regulatory risk management and data protection to name a few among other governance related facets.

Ethical investing actively avoids companies or industries that have a negative impact on society and the environment. This is called negative screening. You can expect sectors such as tobacco, animal testing, gambling and oil & gas to be excluded from this type of investing.

Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets and target a range of returns from below market to market rate, depending on investors’ strategic goals.

The growing impact investment market provides capital to address pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance and affordable and accessible basic services including housing, healthcare and education.

Impact investment can attract a wide variety of investors, both individual and institutional. Impact investing actively selects companies whose positive impact on the world can be measured. This can be anything from generating a specific amount of recycling or saving a certain amount of water.

Socially responsible investing, social investment, sustainable socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social change regarded as positive by proponents.

Values-based investing is an investment approach that looks at the environmental and social impact of a company’s actions, products and leaders.

Conscious investing is investing with a conscious by putting principles before profit-the environment, animal rights, or fair treatment of employees. It is becoming more popular, specifically with millennials.

Green investing is putting your money where your mouth is by investing in companies which champion clean energy, have strong carbon neutral targets and follow sustainable practices. An example is the rise in popularity of green bonds. The move towards green investing is a global shift.

2020 marked the first year that investment in ESG-oriented funds topped US$1 trillion according to FT Advisor 2020. Far from being an ‘investment fad’, ESG investment is here to stay.