If you’ve ever decided not to invest in a fund because it has stakes in tobacco, is invested in a casino, or owns the stocks of a mining company that practices open-pit mining, then you are no stranger to sustainable investing.
Excluding the stocks of companies you deem harmful to the environment or the well-being of communities is known as the negative or exclusionary screening sustainable investment strategy.
Sustainable investing is a financial investment approach that incorporates environmental, social, and governance (ESG) factors and considerations in making investment decisions.
If you plan to enroll in a CFA course and become a Chartered Financial Analyst (CFA), sustainable investing is a topic you need to learn and understand. The CFA Institute is committed to it and has announced that it will increase the CFA program curriculum’s sustainable investment content by 130%.
Even seasoned investment professionals would do well to learn sustainability investing as sustainable investing has become mainstream.
In its 2022 Asset and Wealth Management Revolution report, PwC revealed that the global ESG-related assets under management (AuM) will grow at a projected 12.9% compound annual growth rate (CAGR) and be valued at $33.9 trillion by 2026. By that time, ESG-related investing will comprise 21.5% of the total global AuM.
So, what is sustainable investing? Read on as we provide an overview of the topic.
What Is Investing Sustainably?
Essentially, it’s investing in sustainable companies. Think electric car charging companies, recycling technologies, solar power ventures, companies striving for net zero carbon dioxide emissions, and manufacturers practicing the circular economy model of production.
We can’t leave it at that, however, or we run the risk of gross oversimplification. The CFA Institute gives a more precise definition, saying it’s an approach that balances traditional investing with ESG insights. In other words, it’s using environmental, social, and corporate governance considerations as primary criteria for making investment decisions.
Like traditional investing, a sustainable investment approach aims to produce financial returns and gains on money invested. However, it starts from the premise that ESG factors create economic value and equate to long-term gains.
Therefore, unlike traditional investors, sustainability investors look beyond net income and expense comparisons, growth and value performance, credit rating, and market capitalization, among other factors. They still look at these things but view them through a sustainability lens, specifically, through the ESG framework.
Why Sustainable Investment Makes Sense
Moving towards sustainability is the natural trajectory to investing.
The call for sustainability is persistent and universal, and businesses must accede to their end-consumer’s demand and preference for sustainable products, services, and brands. They must also comply with the legal and regulatory requirements and fulfill the expectations of governments and regulatory agencies.
In this context, investing in sustainable companies is the logical step forward.
The ESG Framework
There is no singular or unified ESG framework, and individual and institutional investors may formulate their own ESG index scoring system. However, below are examples of the typical ESG factors investors use to choose sustainable investment products.
You may use the list as is or build your own framework to apply to your own online investing activities. You can also learn more about ESG by enrolling in an online financial training course with a particular focus on sustainable investing.
Environmental considerations usually include things like:
- Greenhouse gas emissions
- Carbon footprint
- Energy source (renewable)
- Energy efficiency
- Water management
- Pollution and its management
- Waste and its management (recycling, reusing, etc.)
- Environmental impact of products and services
- Technological “cleanliness”
- Sustainability of the supply chain, suppliers, and partners
Social indicators typically include:
- Corporate social responsibility (scholarships, community-building projects, empowering vulnerable sectors, etc.)
- Workforce well-being (health, training, compensation)
- Diversity, equity, and inclusion (DEI)
- Stand on social issues (human rights, gender equality)
- Consumer privacy
- Data security
Corporate governance insights usually stem from the following factors:
- Ownership and leadership (their composition and diversity, who they are, their personal stance on social issues)
- Executive compensation and remuneration
- Organizational legal and regulatory compliance track record
- Financial reporting
- Transparency and disclosure
- Corporate political contributions
- Organizational ethics and culture
- Bribery, fraud, and corruption record
Sustainable Investment Strategies
The ESG factors above can help investors discern sustainable companies and investment products. Meanwhile, the strategies below can help them decide how to allocate their investment.
1. Exclusionary screening
Exclusionary screening is the automatic exclusion of industries, sectors, companies, and projects (and their associated investment products) that fail ESG criteria.
For instance, practicing an exclusionary screening approach, a sustainability-focused investor may refuse to invest in all things related to mining, a fund that owns stakes in a fast-fashion brand, or the stocks of a shoe company that employs children working in sweatshops.
2. Best-in-class screening
Best-in-class screening refers to choosing to invest only in industries, sectors, companies, and projects (and their associated investment products) that are standouts when it comes to ESG factors.
An investor using the best-in-class screening approach will invest only in a solar power venture that produces the least amount of waste and has the greatest impact on a community’s fossil fuel consumption, a hotel with the best workforce compensation and benefits package compared to its peers, and a manufacturer that has successfully operationalized a net-zero supply chain.
3. Activist investing
Activist investing is using investment funds as a tool to influence how a company operates. For instance, one can invest a significant amount into a shoe company to advocate changes in its labor practices.
4. Impact investing
Impact investing is directing investments toward companies that can make a significant impact on a cause or community one deeply cares about.
For instance, an investor can invest in an app that will help minimize agricultural and food waste, a financing program that provides low-interest loans to college students, or a renewable energy producer expanding to depressed communities.
Invest in Positive Change Through Sustainable Investing
Sustainable investing is a financial strategy that goes beyond profit and loss statements by incorporating environmental, social, and corporate governance factors. It boils down to an investor using their money to support the causes they believe in.
Sustainable investing is a way to generate financial gains tempered and informed by non-monetary considerations. It is a responsible investment approach, as it presents an avenue for individuals and institutions to align their financial goals with their values and, ultimately, realize positive change and a brighter future for the generations to come.
Phoenix Financial Training is a leading provider of professional accountancy and financial analyst training courses in the Middle East and North Africa region.
Learn about sustainable investing and other investment topics by enrolling in our CFA course. Contact us to learn more about the CFA program inclusions, eligibility, and requirements.