The Ins and Outs of Sustainable Investing
Building a successful, diverse investment portfolio is an important part of any profitable financial strategy.
One emerging trend that is becoming more popular is sustainable investing. This type of investing can lead to positive social change and promotes environmentally friendly business practices. Focusing on sustainability can be beneficial for both investors and businesses.
This guide will explore sustainable investing and how your company can promote sustainability and improve your ESG rating.
- Sustainable investing puts the focus on long-term societal improvements instead of short-term financial gains.
- Investors rely on ESG scores to determine how sustainable a company or investment opportunity is.
- Sustainable investing is becoming an increasingly large portion of the total investment assets here in the United States.
- Businesses should incorporate ESG principles into the company culture to help guide sustainability strategies.
What Is Sustainable Investing?
Sustainable investing, or ESG investing, focuses on promoting socially responsible principles, such as when the investor considers the environmental, social and governance aspects of an investment opportunity before choosing which companies to support.
Sustainable investing puts more of the focus on long-term societal goals instead of short-term financial gains. With the current push towards more sustainable business practices, companies would do well to focus on improving their ethical and responsible practices.
ESG Factors in Sustainable Investing
Sustainable investment opportunities are evaluated based on their environmental, social, and governance (ESG) factors and given an ESG score out of 100. An investment is considered more sustainable, the higher the score is. The following are considerations used to determine a score:
- Environmental: This factor considers the environmental impact a company has and includes aspects like its water use, conservation efforts, clean technology, carbon footprint, and supply chain.
- Social: The social factor considers how a company or fund functions within society. Analysts consider how a business advocates for social change in the world. Forecasters also consider a company’s stance on human rights issues, the health and safety of its employees, and how engaged a company is within its community.
- Governance: The governance aspect considers how an ETF or company is managed. It includes management quality, executive diversity and pay, financial transparency, shareholder rights, and political contributions.
How Investors Choose Sustainable Investments
When investors seek out sustainable investment opportunities, they usually look for companies with values that align with their own and care about the same causes they do.
For example, if someone cares deeply about the effects of climate change, they might not invest in oil or gas companies. Instead, they will look for companies trying to decrease their carbon footprint and use environmentally friendly practices and materials.
To make this process easier, many individual investors and investment firms rely on ESG scores to guide their funds. This number offers a quick snapshot of the sustainability of a potential investment.
Economic Impact of Sustainable Investing
According to a 2020 report from The Forum for Sustainable and Responsible Investment, more than $17.1 trillion in assets were involved in sustainable investment strategies at the end of 2019. This represents about one-third of the $51.4 trillion in total assets tracked through professional management. In the chart below, you can see how the sustainable investment trend has sharply increased since 1995.
Another indicator of the increasing importance of sustainable investing is the performance of ESG funds. In the first five months of 2020, many ESG exchange-traded funds (ETFs) performed better than the S&P 500.
These positive trends can help investors feel more confident in choosing sustainable investment strategies without sacrificing financial returns. It also shows businesses how important focusing on ESG factors can be.
ESG Investment Methods
Like any investment opportunity, sustainable investments require research. To start, you can read through “best of” lists published by top financial advisors and organizations. These lists may include individual investment opportunities along with funds that group investments together.
For more guidance, investors can try an automated investment approach. However, fees may be associated with these investments, and the ESG guidelines may vary between organizations.
The most customized approach is to work directly with a financial advisor who specializes in sustainable investing. This method will be more expensive. However, your advisor can consider your entire financial situation, including other investments and your personal goals.
How Companies Can Improve Their Sustainable Future
For businesses that want to draw in more investments, it is critical to focus on their ESG performance. Modern investors, especially younger generations, want to put their money into companies that share their values.
Here are a few things your business should consider as you work towards increasing your sustainability:
- Invest In Your Employees: When considering a company’s sustainability, many investors will look at how it treats its employees. Do you offer flexible work environments, adequate benefits, and good compensation?
- Make ESG Part of Your Culture: If ESG factors are an afterthought, you likely won’t see any significant improvements. Instead, ESG needs to be a critical part of your company’s culture. It needs to be a major component of key decisions. When that happens, you will begin to see real change.
- Conduct a Materiality Assessment: This is an exercise that gets feedback from stakeholders to understand what ESG factors are most important to them. Use the results from this survey to guide your sustainability strategy.
In this video, CNBC’s Silvia Amaro discusses some of the challenges associated with ESG investing and why businesses need to consider these factors to continue earning valuable investments.
Emphasize Your Sustainability with Televerde
To help showcase your company’s sustainability efforts, you need to build ESG into your sales and marketing strategy. Televerde has proven processes and experienced professionals that can help your business meet your sales and marketing goals.
We can help you emphasize your environmental, social, and governance practices while helping you achieve your other business objectives.