More and more frequently, sustainable and impact investing is making the news. At Brighter Investing, we love to see sustainable and impact investing in the media because awareness drives action and action drives investment.
Sustainable investing seeks to:
- Maximize benefits to humankind and the environment.
- Minimize harm to humankind and the environment.
- Invest in innovation or investing for impact to solve world issues.
- Invest in accordance with values.
The worst of our industry certainly makes for entertaining cinema. “Boiler Room” and “The Wolf of Wall Street” portray the devastating effects of corporate bad actors taking to the extreme their “competitive spirit” and lack of fiduciary responsibility to stockholders. And in times like these where the media attracts viewers by chasing catastrophe, destruction, and loss, it’s revitalizing to see more coverage of the growing interest and work in sustainable investing and how it can counteract negative effects of “profit-at-any-cost” investing including:
- Short-term focus on profits over a long-term focus on impact and value.
- Lack of care for the impact on the environment.
- Corporate cronyism in government that subverts democracy.
In short, chasing the quick buck—or the quick bump in the stock price—can cause widespread suffering, injustice, and long-term damage. Put another way, it’s unsustainable.
These blind spots leave some people disillusioned with capitalism altogether. Fortunately, others seek to do capitalism better. Instead of focusing on the most immediately profitable choice, they make choices that are more responsible for the the long term.
The exciting part is that you don’t have to be a President or CEO to make a positive difference, The average investor can have a big impact on creating sustainable capitalism through sustainable investing.
What is sustainable investing?
Sustainable investing is an investment philosophy that strives to make a positive impact in the world while maximizing financial return. There are three major components:
- Socially Responsible Investing
- ESG Investing
- Impact Investing
How did Socially Responsible Investing (SRI) begin?
Sustainable investing isn’t new; elements date back to colonial America. For example, in Pennsyvlania, Quaker social clubs prohibited members with ties to the Southern slave economy, which they recognized as immoral and sinful.
Then in the late 1700s, John Wesley, one of the founders of the Methodist faith, preached on the use of money. He exhorted his followers not to harm people in their business practices while discouraging hazardous industries like tanning and chemical production.
This was the birth of socially responsible investing (SRI), a philosophy of denying capital to companies that behave irresponsibly. It’s also the first component of sustainable investing. In the 1960s, SRI popularity surged when labor unions divested irresponsible companies from their pension funds. Later, SRI was considered pivotal in the downfall of the Apartheid government of South Africa.
What is ESG investing?
You’ve seen how someone can modify a recipe to make it healthier. For example, you could use applesauce instead of oil in baked goods and your family would be none the wiser. Similarly, think about ESG investing as a “healthier swap” for “ingredients” in your investment portfolio.
There’s a common misconception that ESG investing and sustainable investing are the same. They aren’t. ESG investing is actually a subset (and the second component) of sustainable investing. It expands the approach of SRI, adding a positive to SRI’s negative.
Whereas SRI seeks only to deny capital to companies that aren’t in line with your values, ESG investing uses data to
- Exclude companies or
- Provide and direct capital support to responsible companies.
ESG investors essentially reward sustainable companies with capital they can use to compete and grow. Of course, that means we need to understand the metrics used to identify sustainable companies.
“ESG” is an acronym for corporate practices that sustainable investors use to evaluate a company:
- Environmental: Does the company mitigate environmental harm by reducing carbon emissions, using renewable energy, or properly disposing of hazardous materials?
- Social: Is the company mindful of its role in the lives of people? Does it pay fair wages, offer safe working conditions, and play a positive role in the community? Does it practice inclusionary and non-discriminatory hiring practices?
- (Corporate) Governance: Is the company structured to avoid conflicts of interest? Is executive compensation tied to long-term growth versus short-term profit? Are corporate practices transparent? Is the company in good standing with regulatory boards?
What’s the goal of Impact Investing?
Impact investing complements the other two components of sustainable investing. It seeks to achieve a specific, measurable outcome (or impact) alongside a financial return. Impact investments help solve environmental or social needs in areas such as renewable energy, healthcare, housing, sustainable agriculture and more. And you can access these investment opportunities across a number of asset classes such as public equities (stocks), private equities/venture capital or fixed income (bonds).
All three elements can work together or separately under the larger umbrella of sustainable investing.
- SRI: This company doesn’t align with our values, so we won’t invest.
- ESG: Our decision incorporates metrics about how this company operates.
- Impact: This company is solving a problem or addressing a specific need in the world while (in most cases) generating a profit.
Why does sustainable investing matter?
Many people want to leave a better world for their children and grandchildren. To accomplish that goal, they can use sustainable investing to align their investing and wealth-building strategies with these values.
Not to mention that sustainable investing has real-world impacts right now. For example, your portfolio has a carbon footprint. And adjusting how you invest can be one of the more impactful steps you can take to reduce yours!
And investors are taking note. According to Morningstar research, the number of conventional funds that consider ESG factors grew from 81 in 2018 to 564 in 2019.
Companies depend on the money raised by the sale of stock and bonds. So if investors don’t approve of a company’s unsustainable practices, this vital source of operational and expansion capital can dry up. When that happens, executives have a strong financial incentive to change those practices. After all, unsustainable practices can contribute to environmental disasters, human rights abuses and bubble economies with joblessness and suffering. Essentially, companies will realize that if they get caught being irresponsible, they’ll lose their allowance.
The more people realize that there are metrics to identify good corporate citizens, the more capital will flow to sustainable companies. It’s a virtuous circle that drives growth and profit for investors themselves.
How can I get started with sustainable investing?
If you invest with an investment advisor or broker, you can simply tell them that you want to add sustainability as a guiding value for your portfolio. For example, let them know that you want to adopt a “sustainable strategy.”
This terminology is buzzy in the financial industry. Since there’s a lot of ambiguity in the terms, make sure your advisor understands the landscape and isn’t just choosing funds labeled “sustainable” or “ESG”. If your advisor is a CSRIC™ (Chartered SRI Counselor), that’s a bonus!
If you personally evaluate each investment, here are some resources to start identifying sustainable companies:
Reports from Watchdog Groups. Look for sustainability resports from the Global Reporting Initiative (GRI) and Principles for Responsible Investing (PRI). They include metrics for various companies including environmental red flags.
“Best Companies to Work For” rankings. Forbes and Fortune publish yearly lists, and websites like GlassDoor.com provide a window into a company’s treatment of its people.
Proxy statements filed with the SEC. These public records are windows into corporate governance practices relevant to ESG investing.
I’d like to invest responsibly. Is it hard?
Investing responsibly isn’t hard. Just do some homework, or work with a professional who has done theirs. In a capitalist society, you’re free to invest as you please. All it takes is the decision and some basic education about SRI, ESG, and what makes a company’s practices sustainable.
How sustainable is your portfolio?
If you own mutual funds or other types of bundled funds, consider auditing the contents, possibly with the help of an advisor that is up to speed on sustainable investing. As a result, you might discover that you’re supporting “bad actor” companies you didn’t even realize. Your advisor can help you re-allocate assets to more sustainable investments.
Plus: Sign up for a review session with Brighter Investing and you can securely upload an account statement for a free analysis. We’ll review your results with you in a 30-minute call.
Brighter Investing is a Public Benefit Registered Financial Advisory Firm, and we specialize in sustainable investing, ESG investing and impact investing. Whether you want to dip a toe into socially responsible investing or transition to an all-in ESG strategy, we can help you align your investments and your values to meet your financial goals.