In the past, we might have learned that the one and only goal of any business is to earn a profit. However, this is definitely no longer the case. For future leaders, especially those interested in environmentalism and entrepreneurship, it’s important to stay ahead of what some call the “Green Revolution''. The rise of sustainable investing, also referred to as ESG (Environmental, Social, and Governance) investing, is a global phenomenon. Defined simply, sustainable investing is an umbrella term for investments that value both financial returns and positive ESG impact.
Sustainability has always been in the back of the minds of investors. But it’s not until recently that many have taken significant steps to integrate sustainability issues into their investment criteria. All around the world, investors are now demanding socially and environmentally conscious investment options, whether it’s in government bonds, hedge funds, equities, or ETFs (exchange-traded funds). As well, it is expected that shareholders will hold corporate leaders to higher standards with regards to their ESG performance.
So, what does this all mean? As future leaders, it’s crucial to understand that sustainable investing is causing a significant shift in the investment world and it will undoubtedly change the way businesses think and act in the long term. As BlackRock, the world’s largest asset manager writes, “We are on the front end of a profound, long-term structural shift in global investor preferences toward sustainability that is not fully priced into the market today and may therefore drive outperformance during a long transition period”.
Common Strategies of Sustainable Investing
Sustainable investing is vast and changing rapidly. To give a more concrete picture of what sustainable investing looks like, some of the common strategies include:
Exclusionary/negative screening: Eliminating companies that contradict your values from your portfolio. This is the oldest method in ESG investing.
Norms-based screening: Eliminating companies that fail to comply with international norms, such as the Ten Principles of the UN Global Compact.
Positive/affirmative screening: Choosing companies with socially and environmentally responsible business practices, and particularly strong ESG performance.
Sustainability-themed investing: Choosing companies that focus on certain issues such as climate change or natural resource scarcity.
ESG integration: Integrating ESG factors when analyzing companies’ long term outlook
Active ownership: Exercising the rights to influence the ESG-related decisions of portfolio companies.
Impact investing: Choosing companies that generate a positive impact as well as a financial return.
The Virtuous Cycle: A Win-Win Situation
With an increasing awareness of climate issues, compounded by
technological advancements that drastically reduce the cost of green technologies, green stocks are becoming increasingly attractive. In fact, it’s believed that this new mega trend will push these green stocks into becoming some of the world’s most valuable companies. A study was done by Augustin Landier of HEC Paris Business School, Jean-François Bonnefon of Toulouse School of Economics, and Parinitha Sastry and David Thesmar of MIT Sloan, which suggests that investors are willing to pay $0.7 per share for every dollar a company gives to charity. This brings to light an interesting idea of a virtuous cycle: the more socially responsible a company is, the higher the company’s ESG rating and the more investors are willing to pay for it to continue investing in ESG initiatives. In other words, it’s a win-win situation for the people, profits, and the planet.
When dealing with times of uncertainty, risk management is key to companies’ success. Sustainable investing has long been a solution to managing risks. Not only are companies with high ESG ratings less likely to be targets of public relations issues, boycotts, or labour problems, but these companies also tend to be more profitable and resilient overall.
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