Sustainable Investing – Taking the Lead on Education and Implementation: In this video, Tony Davidow, CIMA, author of Goals-based Investing, discusses one of the biggest trends across the financial services industry – the growth of sustainable investing. Sustainable investing has grown in both the number of products and asset growth over the past couple of years, according to Tony.
Sustainable investing, also known as socially responsible investing (SRI), ethical investing, green investing, or impact investing, refers to investment strategies that seek not only financial return but also social and environmental good to bring about a positive change. This approach integrates environmental, social, and governance (ESG) criteria into the investment process, aiming to identify companies that are not only financially sound but also operate in ways that are sustainable and responsible over the long term.
Key Aspects of Sustainable Investing
- Environmental Criteria: This involves considering how a company performs as a steward of the natural environment. Factors include the company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also help to evaluate any environmental risks a company might face and how the company is managing those risks.
- Social Criteria: This examines how a company manages relationships with its employees, suppliers, customers, and the communities where it operates. Issues such as working conditions, impact on local communities, health and safety, and labor relations fall under this category.
- Governance Criteria: Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues.
Approaches to Sustainable Investing
- Positive/Negative Screening: This involves filtering investments based on specific ESG criteria, such as excluding companies involved in tobacco or firearms (negative screening) or specifically including companies with strong ESG practices (positive screening).
- ESG Integration: Incorporating ESG factors into traditional financial analysis to identify potential risks and opportunities beyond conventional financial metrics.
- Thematic Investing: Focusing investments in areas related to sustainability, such as renewable energy, clean technology, or sustainable agriculture.
- Impact Investing: Investing with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments are often made in private markets.
Benefits and Challenges
Benefits:
- Risk Management: ESG factors can be indicative of risk management practices and operational performance, potentially reducing investment risks.
- Performance: There is growing evidence that sustainable investing can perform on par with, or even outperform, traditional investments over the long term.
- Alignment with Values: It allows investors to align their financial goals with their personal values and contribute to positive social and environmental outcomes.
Challenges:
- Data and Measurement: Consistent, reliable ESG data can be hard to come by, making it difficult to compare companies and assess true impact.
- Definition and Standards: The lack of uniform standards or definitions for what constitutes “sustainable” or “ESG” can lead to confusion and inconsistencies in how funds are managed and marketed.
- Greenwashing: Some companies or funds may present themselves as more environmentally or socially responsible than they are, making due diligence essential.
Sustainable investing has gained significant traction in recent years as more investors seek not just financial returns but also social and environmental impact. This approach reflects a broader understanding that financial performance is inherently linked to long-term sustainability and ethical practices.
Watch more Tony Davidow and other financial advisor videos from finStream’s Financial Advisor Center at this link: https://www.finstream.tv/videos/financial-advisor-center/