Sustainable investing, also called ethical investing or socially responsible investing, is the practice of targeting investments that not only return a profit, but also contribute to bringing about positive social and environmental changes.
Investors who focus on sustainability look for opportunities in two broad ways. First, they are interested in companies developing products and services that actively contribute to improving the state of the world. Examples of these would be:
- the alternative energy sector
- healthcare services that emphasize inexpensive treatments
- services that emphasize the need of medications for the indigent
- agribusiness firms that are working to scale environmentally responsible food production to the level needed to feed our increasingly crowded planet
Sustainable investing also brings its social values to more traditional corporations in the financial, technology and manufacturing sectors. These investors look beyond the traditional financial bottom line to the environmental, social, and governance (ESG) policies that these corporations promote, and how well they follow through with those policies.
Growth Factors for Sustainable Investing
Sustainable investment opportunities such as “green” mutual funds have been around since the late 1980s, but were always something of a niche market. However, in the last few years, signs are appearing that sustainable investing is going mainstream.
1. Knowledge that poor ESG standards can hurt corporations
First, the largest corporations themselves have begun to recognize that poor ESG standards can hurt them in the marketplace. Social media amplifies any corporate governance scandal by promoting news stories about it. This, in turn, allows people to discuss that news with each other. The repercussions is a populace of suddenly informed people who are able to speak out directly to the corporations, expressing their displeasure (and they do). Social media also enhances the ability to organize and promote boycotts.
In response, some companies have begun revising their ESG policies to be more robust. Policies are starting to move beyond token nods to include environmental concerns and workplace diversity. Annual reports devote pages to showing off advances in setting and meeting ESG criteria.
2. More investors paying attention to ESG criteria for investing potential
Second, more investors are taking ESG criteria into consideration when making investment decisions. Increasing numbers of individual investors want to make investments that reflect their values. This is becoming more prevalent now, particularly as the climate crisis becomes more apparent and economic inequalities become more pronounced.
Even investors who do not care as much about ESG criteria themselves are taken notice. While it may not affect them either way, they do pay attention to findings that companies with poor ESG track records are increasingly punished in the market.
3. Influential institutional investors pressured into observing ESG criteria by constituents
Third, institutional investors like pension funds, endowments, and large mutual funds have a heavy influence in the market. For a long time, most were not overly interested in sustainable investing. But institutional investors are facing increasing pressure from their constituents to take ESG criteria into account. This can range from large donors making or withholding donations based on investment policies to states passing laws enforcing the kinds of investments the state and local government pension funds can make.
Sustainable Investment Amount Has Reached An All-Time High
All of these factors are converging in a way that has led to impressive growth in sustainable investing. A 2018 report from the Forum for Sustainable and Responsible Investment stated that professionally managed assets using sustainable investment strategies increased 38% since 2015. The total amount of money invested has reached $12 trillion, an all-time high.
This is excellent news for investors who may have felt previously torn between wanting their investments to reflect their social values and concerns, and their need to have a profitable return. As more companies recognize the value of social responsibility, we will no longer have to make a choice between doing good and doing well—we will be able to do both.