26 Apr The Rise of Sustainability
In the last 12 months, have you considered sustainability when you invested or purchased goods or services? Has the COVID-19 pandemic changed your thoughts on how you use your purchasing and investing power to make a positive impact on the world and/or the environment?
Increasingly today the value of an investment is no longer just about returns. Investors also call for their money to make a positive impact on society and the world – Profit, Planet & People! According to the U.S. SIF Foundation’s 2020 Report on US Sustainable and Impact Investing Trends, as of year-end 2019, one out of every three dollars under professional management in the United States – $17.1 trillion- was managed according to sustainable investing strategies. The COVID-19 pandemic has only accelerated the movement by clearly demonstrating the negative impact the world’s unfettered economic growth has had on the environment and society. And it has brightly highlighted just how interdependent we are to each other.
So, what does sustainability mean? Sustainability is a blanket term – a “catch-all” for a company or organization’s efforts to do better. With the growing number of investors who want to see their money go toward investments that are both profitable and reflective of their social values, there is a proliferation of investment strategies that integrate sustainable and ethical considerations into the investment process.
There are three main types of sustainable investing –
1) Environmental, Social and Governance (ESG);
2) Social Responsible Investing (SRI); and
3) Impact Investing (II).
While often used interchangeably, distinct differences do exist that will affect how investments should be structured for meeting financial and social impact goals.
ESG, SRI and II: What’s the difference?
ESG investing is the most popular type of sustainable investing. It reviews a company’s (or fund’s) environmental, social and governance practices, alongside more traditional financial measures. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. And, while there is an overlay of social consciousness, the main objective of ESG valuation remains financial performance.
SRI goes one step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines or underlying motives such as religious, personal or political beliefs. For SRI investors, making a profit is still important, but this must be balanced against principles. The goal is to generate returns without violating one’s social conscience.
Lastly, in impact investing, positive outcomes are of the utmost importance. Investments need to have a clear impact objective – a specific goal (s) that are beneficial to society and/or the environment.
My work in sustainable investing has revealed five key takeaways:
1) Sustainable investing has grown significantly over the last 10 years. The COVID-19 pandemic has served as an accelerant and it is here to stay as a key consideration for individuals, investors, businesses, investments and funds.
2) While the terms – sustainability, ESG, SRI and impact investing – are often used interchangeably, there are distinct differences in the strategies.
3) The results are in – sustainable investing and higher investment/business performance are positively linked!
4) While strong efforts have been made to increase transparency and benchmarking, there is still a long way to go to harmonize standards & metrics around sustainable investing.
5) Sustainable investing is aligned and/ or linked with the larger movement in business toward stakeholder capitalism.
For more of my thoughts on sustainable investing, please send me a note. I would love to discuss and share a roundtable presentation- Analyzing ESG Trends Amid Covid-19 – that I recently gave.