You want to grow your business and are looking for ideas. One opportunity you may want to look at is sustainable investing – where investors (and consumers) aim to make a positive impact on society and the environment by factoring environmental, social and governance (ESG) criteria into their investment and purchasing decisions. How can you get involved in this trend? Yes, one option is to invest in it, but another is take those best practices and incorporate them into your business. Venture capital firms are investing more and more in companies that maintain socially responsible principles, while a growing number of consumers – particularly millennials – are shopping with their conscience.
Objectives of sustainable investing:
• Encourage positive environmental, social or governance practices
• Align investments with personal values
• Improve portfolio risk/return characteristics
While there is a common theme of pursuing a greater purpose, there is much variety within sustainable investment strategies, particularly in how they are implemented. Implementation generally takes the form of one or more of the following approaches:
Also known as socially responsible investing or negative screening, this is viewed as the original approach to “responsible” investing. Basically, it excludes individual companies or entire industries from portfolios if their activities conflict with an investor’s values, such as involvement with fossil fuels, gambling or alcohol. This, of course, limits the investable universe, which could impact diversification of your portfolio.
You could also apply this exclusionary approach to your business by, for example, dialing back any dealings with companies, industries or even vendors whose values don’t align with yours; encouraging your employees and clients to go paperless; recycling production materials when possible; making your workplace and office machinery more energy efficient; and engaging with the community for sustainable cause events.
This approach combines environmental, social and governance criteria with traditional financial considerations. It has been gaining momentum as portfolio managers consider ESG themes in their decision-making process. It is sometimes implemented by identifying and investing in companies that are the highest ESG performers within a sector or industry group. A study conducted cites this as the most commonly used method.1
This approach aims to have a social or environmental impact alongside financial return, with a focus on the intentionality and measurement of the impact. The most common products are funds invested in private equity and venture capital, and accredited investors and funds are the leaders in impact investing by asset level.2 With this approach, the liquidity risk and return target can vary dramatically.
Thematic investing focuses on a specific ESG theme, and structures portfolios around companies or industries that support that theme. Examples of such themes include clean energy, environmental protection, sustainable infrastructure, health and social equity.
1 CFA Institute, “ESG Issues in Investing: Investors Debunk the Myths.” 2015
2 Global Impact Investing Network, “What You Need to Know about Impact Investing”
There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss.Diversification and asset allocation do not ensure a profit or protect against a loss.