Sustainable investing is becoming more sought-after amongst investors look to ensure their investments are helping to shape better environment and social outcomes. We’ve compiled an overview of the main sustainable investment strategies to help assist those seeking to understand which approach may best suit their goals.
An increasing number of investors are now looking to invest sustainably. With multiple sustainable investment strategies it’s not always easy to immediately distinguish the differences between them. It is up to the investor to choose the approach that best suits their financial and sustainability goals, so we have compiled some information on common sustainable investing strategies to assist investors with understanding their choices.
ESG (environmental, social and governance) integration:
ESG integration is a general approach to investing that incorporates environmental, social and governance (ESG) considerations alongside traditional financial analysis.
– Broadly speaking, environmental factors include issues such as climate change, deforestation, biodiversity and waste management.
– Social factors include issues such as labour standards, nutrition and health and safety.
– Governance includes issues such as company strategy, remuneration policies and board independence or diversity.
ESG integration is about understanding the most significant ESG factors that an investment is exposed to and making sure that you’re compensated for any associated risk.
Although sustainable investing involves ESG integration, it takes things further by focusing on the most sustainable companies that lead their sector when it comes to ESG practices.
Both the ESG integration and sustainable investing approaches are about engaging with company management to make sure the firm is being run in the best possible way. This can mean challenging a company on its sustainability practices to encourage improvements where necessary.
Screening is when you decide to invest, or not to invest, based on specific criteria.
Let’s say you only want to invest in companies that promote workplace diversity. Your criteria might be substantial representation of women and minorities in management-level positions, and/or the existence of diversity and inclusion policies.
You (or your fund manager) will use these factors to deliberately exclude investments that don’t meet these criteria (negative screening). Or they might purposefully include those that do (positive screening).
Ethical investing is an example of where screening is commonly used. Investors screen out investments that they deem unethical because they don’t fit in with their ethics or values (it’s also called values-based investing).
People commonly exclude so-called “sin stocks” such as alcohol, gambling, weapons manufacturing, tobacco or adult entertainment companies because they view these activities as immoral.
Impact investing is about putting your money to work in a way that has a specific, measurable and positive benefit to society or the environment.
This isn’t to be confused with a charitable donation though. You also want to generate a return on your investment, as well as promote social good.
Let’s say you’re passionate about education in Africa. You can put your money into a fund that invests in companies or projects that are working towards delivering quality education in African communities. Or you can invest directly in these companies or projects yourself.
Impact investing is more common in private markets (i.e. not the stock market). Recipients tend to be small companies with clear social goals that otherwise may not have access to capital.
This is about investing according to your chosen investment theme. Maybe your theme is “health and wellness”. In this case you’ll only want to consider funds that invest in healthy food brands or those companies focused on developing new vaccines.
Or perhaps your theme is “green investing”. If so, you’ll only invest in companies and technologies that you consider good for the environment (alternative energy generators or energy-saving technology manufacturers, for example).
The above is not an exhaustive list of the sustainable strategies available out there. But it should serve as a good starting point to help you understand the differences between some of the common approaches.
Published by Schroders