Sustainable Investing: the What, the How, the Why
5 min read
Many people have heard of ESG-SRI, including sustainable and impact investing. These words may seemingly appear around every corner, in every questionnaire and are growing in popularity. So, what exactly is it all about?
It is important to first understand what these terms actually mean:
- “ESG” stands for Environmental, Social and Governance
- “SRI” stands for Sustainable (or Socially) Responsible Investing
- “Impact investing” seeks to make a positive impact on the World, as well as using ESG and SRI principles at all times
ESG integration as an investment tool is very different from sustainable investing. While some ESG factors do describe aspects of company sustainability, its aim is to unlock factors that solely impact financial performance. For example, an excellent ESG integrated strategy may still invest in sectors that could be considered unsustainable – like tobacco manufacturers or fossil fuel extractors.
A potential issue, and definitely something to look out for, is ‘greenwashing’. This is where a company is making false claims about a product that purports to be environmentally conscious but is not actually making any notable efforts for sustainability at all. To avoid this, seek companies that display their sustainability ‘credentials’ in a clear and easy to understand manner, with no misleading messaging or imagery, backed up by data and compared to a suitable benchmark.
ESG investing has three criteria:
- Environmental impact
- Social impact
The environmental aspect looks at how a company impacts the planet by asking what a company does to reduce its harmful environmental footprint, utilise renewable resources and energy, and how it incentivises its employees to reduce their own footprint.
The social aspect questions how a company treats its employees, customers, suppliers, and the local community. This will analyse healthcare policies, compensation, employee working conditions, discrimination and more.
Governance relates to information about a company’s board of directors, business ethics and structure. Specifically, voting practices, independence, diversity, how new members are selected, how the company trades, levels of transparency, and so on.
Impact Investing seeks to make a positive impact by investing in companies whose products and services create positive impacts rather than just avoiding a negative impact. Impact investing also adds another element: the ability to measure the (global) effect of the investment.
This usually means that Impact Investors are more focused on creating a measurable impact on the World, even if it means foregoing a larger financial return possible elsewhere. It should be noted however that a lower financial return is far from being the norm nowadays from an Impact portfolio.
A lesser-known facet of ESG investing is to look for companies that are B-Lab certified as a B-Corp. B Lab creates standards, policies, tools, and programs that shift the behaviour, culture, and structural underpinnings of capitalism. Discover more about B-Lab’s work as a non-profit here.
There are clear reasons for the rise of ESG investing. Volatility in this sector has seen a great decline for investors over the last 5 or 6 years and it is now possible to obtain enhanced returns with reduced volatility risk in some cases. This is making ESG investments highly attractive as this sector develops further.
In addition, consumers and investors are holding companies accountable for their impact on environmental, social and governance factors against relevant benchmarks. This leads to the decision that a more ESG oriented company may deserve your money over a less ESG oriented company.
A record $649 billion poured into ESG-focused funds worldwide up to 30th November 2021. This was up from $542 billion in 2020 and $285 billion in 2019, making a 127% annual increase over just two years! In December 2021, Morningstar Direct estimated that global sustainable fund assets reached $2.7 trillion.
Sustainably Investing for the Future
ESG and Impact Investing should not be only for a select few. At Patterson-Mills, we believe in investing for a better future and making it accessible for all. To accomplish this, we offer tailored solutions from a carefully selective range of funds, fund managers, with rigorous analysis of appropriate criteria. Following an initial no-obligation meeting, we create a bespoke recommendation for our clients so as to successfully achieve their investment objectives.
Whether our clients wish to invest 100% of their available capital into ESG, SRI and Impact Investing fund styles, or maybe 25%, or perhaps initially none at all, we have a suitable offering available. However, the key is to be put into a position to make a fully informed choice, which at Patterson-Mills, we show all prospective clients.
Our interests and those of our clients are one and the same, and so we only use proven, cost-effective, and tailored solutions in order to produce the most positive outcomes for our clients’ financial objectives.
Get in touch today and book your free no-obligation review meeting. You have nothing to lose and potentially lots to gain!
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