Sustainable Investing – What Do You Need to Know?
It’s not possible to open a paper, or more likely a news website, these days without seeing an article about the environment and global warming, or the social injustices imposed on people, particularly in emerging economies.
Given what we have experienced in Australia in the past few years, with devastating bushfires and floods, and what is happening around the world politically, it only makes sense for more people to be considering sustainable investing.
But these days it’s not always as simple as choosing not to invest in mining stocks for instance. Because not all companies are created equal. While most companies listed on the Australian Stock Exchange (ASX) are attempting to embrace ethical and sustainable standards, not all will be achieving the benchmarks you might find acceptable, or in the areas which most concern you.
Let’s take a look at what sustainable investing means, and why it could actually be good for your bottom line.
What Is Sustainable Investing
Harvard Business School define sustainable investing as:
“… a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social value.”
Sustainable investing is not a new phenomenon. As far back as the 18th century there have been groups of investors following ethical guidelines on what types of companies to invest in.
However, in recent years, sustainable investing has taken off around the world. A 2021 Global Sustainable Alliance study found sustainable investment reached $35.3 trillion in the five major markets in 2020 (USA, Canada, Europe, Japan and Australasia). This represented a massive 55% increase in investment from 2016.[i]
Sustainable investing is sometimes referred to as ESG. This acronym stands for environmental, social and governance, which are the three key pillars you can use when measuring the sustainability and ethical impact of company. There are many specific questions to consider under each pillar, but they may include:
This includes factors like the dependence and use of fossil fuels versus renewable energy, recycling and reuse, management of water, pollution production and disposal of hazardous waste. Is their operation affecting endangered species, or their habitats?
Evaluating the social impact of an investment can begin with the broadest picture of the way the company operates, right down to the fine details. Does the company operate or manufacture within a country where women or minorities are repressed? Are their wage and employment practices fair, equitable and safe. Do they test on animals?
This pillar refers to the way the company is run. Is there gender, ethnic and ability diversity within management? Do they practice, rather than just pay lip service to, good ethics and values? Is there corruption, illegal or questionable activity within the organisation? Are their data security policies sufficient?
Before you can begin to practice sustainable investing you need to decide what it means for you personally. Think carefully about the issues you feel strongly about, are you most concerned with pollution, or deforestation, or habitat destruction? Perhaps your concerns lean more toward social responsibility and issues like pay and working conditions in emerging economies, or the treatment of women or minorities. Or it could be all of the above and more.
The three pillars of sustainable investing we talked about earlier will help you here. List out your areas of concern. This will provide you with a basis for your research into each investment.
Once you have a clear idea of the issues and areas that you feel strongly about it’s time to get researching. Doing your due diligence on any investment is a given, but when you are also looking to ensure you are making sustainable investments, you will need to dig a little deeper. It’s not unheard of for companies to ‘greenwash’ their operations to make them appear much greener or more sustainable than they really are. Look for real, quantifiable achievements and evidence of active change in areas that match what you see as important.
Annual reports, social media and traditional media are all good places to start. If you are finding it difficult to get the information you need, a good financial advisor can help.
Once you’ve found the companies that you believe match your principles, you need to keep an eye on them. Make sure they are walking the talk. If they have said they will achieve zero greenhouse emissions by a certain date, keep an eye on them.
If the investments you choose don’t measure up, you can always move on to companies that do.
Impact On The Bottom Line
If you choose to invest ethically and sustainably, you need not fear your returns will suffer. A 2019 study of 11,000 Mutual Funds found that not only did sustainable funds generally prove more stable than others in a volatile market, but sustainable funds showed a significantly lower downside risk, and in fact performed comparably to traditional funds.[ii]
So you can feel good about your investments, whilst at the same time feeling good about the returns you are making.
A Word About Managed Funds
There are a good number of Managed Funds where the focus is sustainable investing. This form of investing can save you time and effort in research. Just be aware that you may not find a fund which exactly matches your preferred profile. However, if you have a very broad range of concerns, a Managed Fund could be the best option for you. Again, a good financial advisor can help with choosing the right fund for you.
If you have concerns around ethical and sustainable investing and would like to ensure your portfolio reflects your values and principles, Manly Financial Services can help review where you are, and provide detailed and accurate research. Give us a call on (02) 9976 3388, or contact us via the below link.