As investors, we want companies to take climate change and human rights seriously. We want to see companies taking steps to mitigate their impact on the environment and improve the lives of their workers. We believe these companies are more likely to succeed in the long run.
Companies are under pressure to prove they are sustainable and focused on long-term performance rather than short-term profit. This pressure comes from consumers and shareholders who want to see companies respond better to issues and events. As a result, companies need to create a more inclusive, sustainable, and resilient operating environment.
Many people are interested in sustainability, especially the younger generations. People want to know that their money is making a positive difference. The popularity of sustainable investing is increasing as people realise that environmental, social, and governance (ESG) factors can positively impact long-term returns.
3 Versions of Sustainable Investing
Ethical, responsible, and sustainable investing are often used interchangeably, but they have different meanings.
- Sustainable Investing
In sustainable investing, the primary focus is on how a company affects society and the environment rather than simply on its financial returns. This approach considers various factors, including a company’s corporate social responsibility, ethical practices, and environmental impact. While sustainable investing encompasses several different investment strategies, the goal is always to create a well-rounded picture of a company to make more informed investment decisions.
- Impact Investing
Impact investing is investing that is focused on businesses that have a distinct social or environmental purpose. This could include businesses that focus on improving social outcomes or renewable energy. If you are interested in impact investing, you are likely as interested in your investment’s positive social or environmental outcome as in the financial return. To do this, you need to find companies or ETFs that share your values and that you can invest in.
- Ethical Investing
Ethical investing is a type of investment that considers a person’s ethical values. This means that people who invest ethically will not invest in companies or industries that they believe are unethical. For example, an ethical investor might avoid investing in companies that produce cigarettes or that do business in countries with poor human rights records.
What Can You Do as a Retail Investor?
Various things can affect a company’s success, and some have nothing to do with the standard measures of business and financial performance. When looking at ESG factors, knowing what you want to achieve from sustainable investment is important. What is important to you, and what outcome do you want from including this information in your investment process?
There are many ways to start investing in sustainable or ethical companies. One option is to allocate a portion of your funds to a dedicated sustainable or ethical ETF. Another option is to personally invest in companies you recognise as being involved in social or environmental projects.
Conclusion
Sustainable investing is not only about doing good—it can also be a smart financial decision. Companies focused on sustainability tend to be well-managed and have strong track records. Furthermore, sustainable investing can help to diversify your portfolio and reduce risk. If you’re interested in sustainable investing, there are many ways to get started!
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