It’s a way to invest for the returns you expect while staying true to your values. It is an investing strategy that considers environmental, social, and corporate governance (ESG) factors.

Three main ways to invest sustainably:

Exclusion

Exclude companies and industries that don’t reflect your values from your portfolio.

Integration

Integrate environmental, social, and corporate governance factors into your portfolio to improve your returns and reduce your risk.

Impact

Invest with the intention to generate measurable environmental and social impact, alongside a financial return.

Traditional investing delivers value by translating investor capital into investment opportunities that carry risks commensurate with expected returns. Sustainable investing balances traditional investing with environmental, social, and governance related (ESG) insights to improve long-term outcomes.

In many ways, sustainable investing can be seen as part of the evolution of investing. There is a growing recognition among industry participants that some ESG factors are economic factors, especially in the long term, and it is, therefore, important to incorporate material ESG factors.

Why Is Sustainable Investing Important?

Interest in sustainable investing continues to grow, and the pressure is on for investment organizations to move toward the sustainable investing model. In an era when the investment industry is challenged by rising end-client and regulatory expectations and challenging economics, the alternative of maintaining the status quo leaves the industry vulnerable to decline.

The next stage of development will depend heavily on industry leadership and innovation in investment thinking and practice, as well as data management. If these are present, the future is exceptionally bright.

Growth of sustainable investing

Assets in dedicated sustainable investing strategies have grown at a rapid pace in recent years, and this trend is showing no signs of slowing. The practice of investing in companies or funds that aim to achieve market-rate financial returns, while considering positive social or environmental impact, is gaining more popularity than ever before among institutional investors, according to a new report from Morgan Stanley, jointly issued by its Institute for Sustainable Investing and its Investment Management division, Among asset owners surveyed, 80% said that they actively integrated sustainable investing in 2019, up 10 percentage points from Morgan Stanley’s last biennial survey in 2017. Factors driving this increase include constituent demand, perceived potential for attractive financial performance and evolving regulations that are driving greater disclosure on environmental, social and governance (ESG) factors, the survey says.

Sustainable investing is on the rise globally, with assets under management having surged from $30.7 trillion in 2018 to $35.3 trillion in 2020, according to the Global Sustainable Investment Alliance (GSIA).

The pathway to profit

With more rigors comes more responsibility – and more investor confidence, meaning the old adage that you could invest responsibly, or you could make money, but you couldn’t do both, is no longer true.

“There is research saying that if you look at sustainability ratings and ESG risks, if you invest in the most sustainable in each sector, you can make money”. Of course, not every fund is guaranteed a profit – whether they’re sustainable or not – and returns can vary.

But as more light is thrown on the importance of sustainable business and sustainability at large, those companies that invest in clean, green businesses are seeing better returns because of their ability to adapt to the world in which we live.

Sustainable investing is going to be the norm

In the last decade, various governments worldwide have enacted over 500 new measures to promote environmental, social and governance issues (ESG). Given the magnitude of the task, various players are involved: governments, regulators, capital markets, businesses, and consumers; and they are aided and abetted by green technologies and business model innovations.

Future success critically hinges on three factors: a new model of shareholder engagement that enjoins investors to go from distant owners to vocal change agents; savvy implementation of sustainability into investment portfolios; and business leadership that is keen to capitalize on the opportunities arising from the transition.

Sustainability is set to morph into the new gold standard, as our societies seek to overcome the side effects of the turbocharged capitalism of the past 40 years. Before then, sustainability is beset by its own challenges. But early movers see it as no more than a concealed opportunity to create businesses of enduring value — and profit from them.

Institutional factors are fast driving change. Pragmatism has been all too evident, with concerted action now in progress. There is an increasing realization that finance must give something back to society as well as making profit. Early results are encouraging. Only responsible ownership and savvy implementation will deliver sustainability. They will also differentiate the winners from the losers.

“It’s going to become the norm. We’re going to be talking about investment but consider the financial as well as non-financial impact.”

Some major avenues for Sustainable Investing

• Renewable Energy
• Pollution Controls
• Green Transportation
• Waste Reduction
• Water Investments (Collect, Purify and Distribute Water)

ESG and sustainable investing are expected to continue exceptional growth in the future and there has been tremendous growth in the amount of investment capital directed towards climate change, environmental issues, renewable energy, and sustainable investing.