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When it comes to investing, deciding where to put your money can be, at times difficult. What are your driving factors behind the decision: financial, low risk, or something that adds value to our society? Does sustainable investing tick all three? And should you do it?
What is sustainable investing?
Sustainable investing, or socially responsible investing, is an investment strategy that considers both financial return and positive social change and incorporates environmental, social and governance (ESG) factors.
How effective is sustainable investing?
To answer that, we’ll consider the objectives investors have when buying ESG funds.
The reality is that ESG investing is trending. In 2021, a record $649 billion was invested in ESG-focused funds worldwide.
Besides its social responsibility, investing in an ESG fund is profitable and low risk.
First of all, companies with ESG impact are sought after by younger investors that are concerned about climate change, poverty or access to healthcare. According to EY, “millennials are poised to receive more than US$30t of inheritable wealth.”
Whether you’re a millennial or not, this demand for sustainable investing means that more and more companies will start looking internally at what they can do to create more positive change.
This leads us to the second point: by moving towards the ESG space, you won’t make financially risky investments in unsustainable companies, such as fossil fuel companies. By not investing in fossil fuels, you will be immune to a carbon tax.
By investing in sustainable companies, you will increase your returns. For example, industries like electric cars are the future of transport, so they are not only a safe investment but also a profitable one.
Aware of this, fund managers worldwide are allocating more and more resources into developing products that will future-proof their company and attract the younger generation.
CFOs like Renee Minchin from 2account have the inside scoop into the mindset of companies looking to shift into the ESG space, and that’s because they fill the essential role in supporting companies to align their financial interests with their social and environmental responsibilities.
“It has been a switch we’ve seen in the last couple of years, where people have started taking a more ethical standpoint. And we see this with investors too. The investor type that we’re getting through now definitely has a more sustainable than financial mindset. They want to invest in something that is more long-term for the wider society rather than short-term financial gain,” Renee says.
Sustainable investing is about investing in progress, so the integration of money and values is paramount for an ethical-minded investor. And with governments being traditionally slow at applying changes, especially regarding climate change there’s no time to wait. So a lot of private investors and companies have the flexibility to take matters into their own hands now.
“The other flip side I’m seeing is that some of the younger companies coming to market are actually feeling this ESG space – they are not motivated by money, they are motivated by the sustainable piece. It’s a totally different mindset than before,” Minchin adds.
As of now, 1,510 companies are committed to fossil fuel divestment. Divestment means that a company sells a part of its assets to improve its ESG.
But how do we know that our investment aligns with our values and it’s not just a case of greenwashing? “A lot of companies are focusing on the E aspect, but if you want to invest in a truly responsible company, take a closer look at the S and Gs as well,” says Minchin.
And regulations are coming into place to make sustainable investing even more effective and transparent. In 2022, SEC proposed a rule that requires U.S. companies to reveal to their shareholders what challenges the threat of climate change would have on them.
Aligning your portfolio with your values is a good thing. Sustainable investing is low-risk, has high returns and supports socially responsible global movements. While the sector will undoubtedly change and refine, ESG investing is a trend that’s here to stay.
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