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What Is Sustainable Investing?

Sustainable investing is the idea that investors can achieve a positive societal impact with their investments. Optimally, this should be accomplished without sacrificing long-term financial returns.  The possibility of achieving these dual objectives is what investors in increasing numbers find attractive.  In recent years, a growing number of individual and institutional investors have been adopting…

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Sustainable investing is the idea that investors can achieve a positive societal impact with their investments. Optimally, this should be accomplished without sacrificing long-term financial returns.  The possibility of achieving these dual objectives is what investors in increasing numbers find attractive.  In recent years, a growing number of individual and institutional investors have been adopting sustainable investing strategies.  Moreover, the same investor groups anticipate that sustainable investing will become even more important over the next few years.  But investors should be aware that the successful implementation of such strategies calls for the application of basic investment principles and due diligence.

Sustainable investing can be pursued through a variety of sustainable strategies, but most practitioners agree that these encompass one or more of the following four notable approaches:

  • Screening out or excluding companies from investment portfolios for a variety of reasons, including ethical, religious, as well as other strongly held beliefs, such as environmental concerns or involvement on the part of companies in specific business activities, such as gambling and sex-related activities, the production or manufacturing of alcohol, tobacco or firearms, or atomic energy. In general, this investment approach, when viewed through the prism of mutual funds, has produced an uneven financial track record.
  • Impact investing or investing to achieve a targeted social or environmental objective that is measurable, for example, such as investments in companies that develop or offer products or services seeking to protect the environment or provide environmental solutions intended to reduce greenhouse gas emissions that are widely believed to bring about climate change, or companies that promote workplace diversity, human rights and community relations, advance educational initiatives or attempt to alleviate housing shortages and poverty, to mention just a few.
  • Integrating environmental, social and governance (ESG) considerations as a proactive and integral component of the investment research and portfolio construction processes, including companies with social and environmental objectives that some investors believe can serve to minimize certain vulnerabilities, such as the risk of lawsuits from employees or toxic spills, and look for these attributes as predictors of long-term financial performance, and
  • Shareholder and bondholder advocacy and engagement in an effort to influence corporate behavior.

These strategies are not mutually exclusive and investors can engage in one or more of these at the same time. Moreover, it’s not always entirely clear where one strategy begins and another ends, as these can also morph into one another. While the above definitions attempt to broadly define sustainable strategies, there are potentially other investing approaches that aim to achieve a positive societal impact and financial returns that might not lend themselves to easy classification.  For example, investing in or financing microfinance institutions that seek to provide banking services to poor families and micro-entrepreneurs falls into this category.

Sustainable investing has been gaining a footing among individual investors as well as a wide range of mainstream institutional investors.  These include public pension funds, endowments, foundations and insurance companies, to mention just a few, as well as traditional investment management firms.  Historically, much of the focus of sustainable investing has been on stock oriented strategies, whether through individual securities or funds.  As more investors seek to apply a sustainable approach to their entire portfolio of securities, attention has begun to shift to other asset classes, including fixed income and real estate.  This approach in one form or another has also found its way into alternatives, such as hedge funds and private equity portfolios.

Investors can implement sustainable investing strategies by purchasing individual stocks, bonds, mutual funds, Exchange Traded Funds (ETFs), Unit Investment Trusts (UITs) and even closed-end funds.  But regardless of the approach, the same basic investment principles apply before a purchase decision is made.  That is, investors have to conduct fundamental due diligence and analysis to evaluate the investment to make sure that it fits with their return requirements, risk tolerance, income needs and asset allocation goals.  In addition, the investment’s sustainability profile should be aligned with the investor’s goals and objectives. Typically, due diligence efforts should focus on management characteristics and stability of organization, historical performance or financial track record, expenses as well as any other investment specific relevant  considerations which will likely vary from one investment to the next.

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Research

Research and analysis to keep sustainable investors up to-date on a broad range of topics that include trends and developments in sustainable investing and sustainable finance, regulatory updates, performance results and considerations, investing through index funds and actively managed portfolios, asset allocation updates, expenses, ESG ratings and data, company and product news, green, social and sustainable bonds, green bond funds as well as reporting and disclosure practices, to name just a few.

A continuously updated Funds Directory is also available to investors.  This is intended to become a comprehensive listing of sustainable mutual funds, ETFs and other investment products along with a description of their sustainable investing approaches as set out in fund prospectuses and related regulatory filings.

Getting started

Many questions have surfaced in recent years regarding sustainable and ESG investing.  Here, investors and financial intermediaries will find materials that describe the various approaches to sustainable investing and their implementation.  While sustainable investing approaches vary and they have thus far defied universally accepted definitions, many practitioners agree that they fall into the following broad categories:  Values-based investing, investing via exclusions, impact investing, thematic investments and ESG integration.  In conjunction with each of these approaches, investors may also adopt various issuer engagement procedures and proxy voting practices.  That said, sustainable investing approaches will continue to evolve.

In addition to periodic updates regarding sustainable investing and how this form of investing is evolving, investors and financial intermediaries interested in implementing a sustainable investing approach will also find source materials that cover basic investing themes as well as asset allocation tactics.

Inesting ideas

Thoughts and ideas targeting sustainable investing strategies executed through various registered and non-registered sustainable investment funds and products such as mutual funds, Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), closed-end funds, Real Estate Investment Trusts (REITs) and Unit Investment Trusts (UITs). Coverage extends to investment management firms as well as fund groups. 

Independent source for sustainable investment management company research, analysis, opinions and sustainable fund disclosure assessments