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What is sustainable investing?
The world of investing can sometimes seem all too corporate and difficult to comprehend. And as Warren Buffet, one of the greatest investors of our century, once said, you should never invest in a business you cannot understand. If there’s one thing the world is starting to understand, though, it’s that sustainability needs to be at the forefront of everything we do. If this resonates with you, then sustainable investing is something to consider.
Sustainable investing, also known as green, impact, or responsible investing is an investing discipline that considers three aspects: environmental impact, social impact, and quality of corporate governance (ESG). These three criteria are taken into account in order to have a positive societal impact, as well as a positive financial return when investing.
Investors focus on companies that might work on things such as sustainable energy production, sustainable food production or reducing waste. An example of a company that considers the environmental impact would be one that uses renewable energy sources that emit fewer greenhouse gasses, or one that adopts a no-deforestation policy.
Companies that consider and minimise the negative impact on each stakeholder are favourites when considering this investment criterion. An example is a food and beverage company that gets its supply by working with smallholder farmers, thereby improving the livelihoods of those farming communities.
When considering the quality of governance, one would look at how well a company is run. Does management look out for themselves or all stakeholders? Do they have efficient policies to care for staff and handle conflicts? A company that has high quality governance is one that discloses all policies, has transparent accounting methods and clear guidelines for eradicating bribery and corruption and that align shareholders’ interests with management.
Why invest sustainably?
First and foremost, people invest sustainably due to personal values that drive them to not only make a profit, but also to have a positive impact on society and the environment.
Studies have also shown that there’s a strong link between this investing discipline and financial profitability, as the world moves towards an environmentally friendly state of mind. Companies that solve some of the world’s biggest problems are naturally most likely to grow.
It also seems as though the total expense ratio (TER)* for investment funds with an ESG focus is similar to traditional investment funds, making the sustainable decision even easier.
How to invest sustainably
There are several strategies investors follow to ensure their investments are sustainable. Some investors choose to avoid “sin” stocks such as tobacco, casinos, alcohol, and firearms, known as negative screening. Others research how well the investment opportunities hold up to one or more of the three pillars of sustainable investing; environmental and social impact, and governance quality, known as ESG integration. Using this method, investors can still have holdings in less sustainable funds, however, the majority lies in sustainable investment opportunities.
ESG investment opportunities can be found everywhere. ESG ETFs, unit trusts and mutual funds are available, while several other platforms have been committing to making sustainability a key part of their investment process.
The ESG scores for most companies can be found online, so you can easily check them out before making your sustainable investment decisions.