For many, investing is simply a way of growing their personal wealth. But an increasingly mindful cohort of investors is using their net worth to make an impact on the world. These socially, ethically, and environmentally conscious investors are opting for sustainable investments by choosing to put their money behind companies that are finding better ways to do business.

Sustainable investments combine traditional investment strategies with insights into a company’s environmental, social and governance (ESG) principles. The idea is that by paying attention to a company’s or fund’s efforts towards sustainability, investors can encourage them to actively pursue policies and operations that create positive changes and build a better future.

In fact, these types of investments have become so popular that the US Forum for Sustainable and Responsible Investment reports that between 2018 and 2020, the number of assets allocated to sustainable investments grew from $12 trillion to $17.1 trillion. The trend is especially pronounced in Asia and Europe, where individual countries have seen a marked rise in interest in ESG strategies. Between 2018 and 2020, India and China saw a 2% and 3% increase respectively, but France and Germany saw double-digit increases of 12% and 17%.

Photo: Unsplash/Markus Spikse

WHAT'S DRIVING SUSTAINABLE INVESTMENTS?

There are several good reasons why sustainable investments are suddenly en vogue. Young investors are coming of age in a time when public attitudes and preferences are demanding more ethical and sustainable solutions from companies across different industries, from food to fashion and electronics to energy.

In addition, policymakers around the world are pursuing ESG goals, from net-zero carbon emissions to greater inclusion in employment, putting greater pressure on companies to adopt a more sustainable mindset. Add to this the fact that there’s growing consensus that ESG considerations can help identify potential investment risks and generate improved returns, and there’s even more financial incentive to focus on sustainable investments.

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TYPES OF SUSTAINABLE INVESTMENTS

There are several types of sustainable investment strategies, each one catering to an investor’s specific interests and attitudes, but the four below are among the most popular.

ESG Integration uses a company’s ESG information to inform investment decisions. Investors analyse a company’s environmental, social, and governance factors alongside financial data to screen potential investments for risks and opportunities. With the ESG integration strategy, financial returns are still the main goal. But, factors such as a company’s energy consumption, human resources management, community engagement, and management are evaluated for their potential effects on its financial performance.

Also known as socially responsible investing, exclusionary investing actively excludes companies that are controversial or do not meet the investor’s criteria. For example, a socially responsible investor might decline potential opportunities with any company involved with gambling, firearms, or fossil fuels, or that has a reputation for human rights violations.

By opting for an inclusionary investing approach, investors choose to put their money behind companies that rank higher on sustainability criteria than their competitors. Sometimes referred to as using “positive screening” or a “positive tilt” on investments, these investors might choose a tech company that performs better on various ESG factors or has the lowest carbon footprint in the industry, for example. It’s a more nuanced balance of financial concerns and sustainable considerations.

With impact investing, the focus is on creating tangible, positive outcomes. The objective is to encourage companies to reach specific societal and environmental goals while maximising financial returns. As such, impact investments may fund renewable energy research or companies that allocate a portion of their profits to help the local community.