A very interesting debate that is gaining traction globally, is whether sustainable investing is just a trend or a very viable investing strategy. Last year, the spotlight was on India, when the Global Steering Group for Impact Investment (GSG), an independent organization catalyzing impact investment and entrepreneurship, held its annual summit in New Delhi.
In Sustainable Investing: Revolutions in theory and practice, the authors note that while financial considerations now factor in sustainability considerations for ongoing societal success, sustainability issues equally need to be driven by a business case. Sustainability without a business case is just philanthropy. Finance without sustainability is a recipe for environmental and social disaster. What the world is now witnessing is that capital is moving environmental and social issues from areas of concern into positive solutions that provide a chance for financial outperformance.
Hence, staying informed about recent trends in sustainable investing is imperative, despite the prime motivation.
So what is sustainable investing?
According to iShares, a family of exchange traded funds owned by BlackRock, sustainable investing is about investing in progress, and recognizing that companies solving the world’s biggest challenges can be best positioned to grow.
Worth noting is that sustainable investing is a spectrum where various investment approaches are placed.
ESG, an acronym for Environmental, Social, Governance, would include monitoring a host of parameters, such as carbon emissions, energy efficiency, waste management (E), human rights, labour standards (S), audit committee structure, board composition (G).
Socially responsible investing (SRI) traditionally focuses on exclusionary screening to ensure a portfolio reflected the values of an investor.
Impact investing refers to investments that attempt to deliver measurable social or environmental impacts alongside their financial returns.
ESG, SRI, investing and investing, are terms often used interchangeably to describe this space that is driving a lot of interest at the moment. And all these terms mean different things to different people.
Hortense Bioy, Morningstar’s director of passive strategies and sustainability research in Europe, helps us navigate the jargon surrounding sustainable investing. While you can watch the video here, she breaks it down to three approaches based on what investors believe in and want to do, and notes that these can overlap.
- Some individuals people just want to exclude stocks that don’t reflect their personal values. For instance, they may choose to steer clear of investments in weapons or tobacco or alcohol companies. These companies will be screened out from their investment shortlist. Investors who choose this approach, need to be aware that exclusions purely on the basis of ethical criteria may potentially affect their investment returns negatively.
- For a number of individuals, sustainable investing means ESG integration. It is about using environmental, social and governance factors to mitigate risk and potentially generate alpha. So, the objective here is not ethical but financial. An increasing number of asset managers are deep diving into this strategy, and it is expected to become the new normal. Eventually, every professional investor will integrate sustainability in their investment decisions.
- The third approach is thematic and impact; you, as an investor, want to make a difference. So alongside generating a good financial return, you also want to solve the world’s problems. For instance, you want to tackle climate change, finance energy transition, or improve people’s wellbeing. Impact investing is perhaps the most exciting but also the most challenging part of the sustainable investing space.
