Sustainable investing, an approach that integrates environmental, social and governance (ESG) criteria, is becoming a much sought-after strategy in the financial industry. Whether implemented through socially responsible investing (SRI) screening, ESG integration or impact investing, sustainable investing offers a growing number of options for investors interested in achieving goals beyond financial growth when building their portfolios.

Whereas conventional investing is focused on risk/return, and philanthropy seeks solely to benefit charities and causes without return or income consideration, sustainable investing looks to accomplish both in varying degrees along a spectrum of possible outcomes.

environmental social governance investing timeline image

The paths to achieving effective global stewardship and possible growth are coming together in the investor mindset. Sustainable investing, when incorporated into a well-defined, long-term investment plan, can be a powerful tool in addressing global challenges while achieving personal financial goals.

Investors may consider sustainable investing for a host of reasons:

  • Risk mitigation
  • More conscious approach to investing
  • Long-term performance
  • Align investing with personal or religious views
  • Fiduciary duty

What are the approaches?

While there is a common theme of pursuing a greater purpose, there is much variety within sustainable investment strategies, particularly in how they are implemented. Implementation generally takes the form of one or more of the following approaches:

Exclusionary Screening

  • Viewed as the original approach to “responsible” investing
  • Also known as socially responsible investing or negative screening
  • Excludes individual companies or entire industries from portfolios if their activities conflict with an investor’s values, such as fossil-fuels, gambling or alcohol
  • Limits investable universe, which could impact diversification

Impact Investing

  • Aims to have a social or environmental impact alongside financial return, with a focus on intentionality and measurement of impact
  • Ranges from grant support to private equity; liquidity risk and return target can vary dramatically
  • Most common products are funds invested in private equity and venture capital
  • Accredited investors and funds are the leaders in impact investment by asset level

Global Impact Investing Network, “What You Need to Know About Impact Investing,” https://thegiin.org/impact-investing/need-to-know/#s2

Integration

  • Combines ESG criteria with traditional financial considerations
  • Gaining momentum as portfolio managers consider ESG themes in their decision-making process
  • Sometimes implemented as a best-in-class approach by identifying and investing in companies that are the best ESG performers within a sector or industry group
  • A study conducted by the CFA Institute cites integration is the most commonly used method1

 

1CFA Institute, “ESG Issues in Investing: Investors Debunk the Myths.” 2015

Other Dimensions

  • Thematic investing – focuses on a specific ESG theme, and structures a portfolio around companies or industries that support that theme
  • Shareholder engagement (activism) – actively engages with a company, directly working with management or exercising shareholder rights to effect change

Investing involves risk and you may incur a profit or loss regardless of strategy selected.