What is Sustainable Investing?

Sam Ngooi Life with Money

This week’s Life with Money features PPA advisor Samantha Ngooi exploring sustainable investing. This is a substantial, important, and somewhat complex topic – so our discussion will extend across a few installments of Life with Money.

In today’s part one, we provide broad definitions of various relevant terms and discuss why someone might want to invest this way. In upcoming parts, we will delve further into how the various investments work and what PPA suggests clients might look for in potential sustainable investments.

Enjoy, and please be in touch with follow-up thoughts or questions.

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Sustainable investing takes into consideration a company or investment’s environmental and social impact, often with the goal of positive change for the world and a long-term financial gain for the investor.

With a history dating back centuries, this approach to investing has recently exploded into an alphabet soup of terms and definitions, often used interchangeably. While we use sustainable investing as an umbrella term, here are some definitions to help clarify (recognizing this is just the tip of the iceberg):

  • Socially-Responsible Investing (SRI):  this term has historical roots in investing and divesting according to religious, ethical, or moral values. SRI traditionally focused on divesting from undesirable industries (e.g., guns, alcohol, etc.) but now focuses on investing in a way that expresses values (these may belong to investors, fund managers, or a specific theme).
  • Environmental, Social, and Governance (ESG):  this is a system for measuring the sustainability of a company or investment based on its environmental, social, and governance policies and data. Environmental issues can touch on resource conservation and waste, while social aspects look at a company’s impact on internal and external stakeholders (e.g., workplace safety and ethical supply chains). Governance measures a company’s leadership and accountability to shareholders (e.g., how diverse is the board). The key takeaway is that ESG data is often combined with traditional financial metrics to pick or eliminate certain companies in ESG investment options, such as mutual funds and exchange-traded funds (ETFs).
  • Impact investing: often used to describe private investments in and lending to companies that have the intention to do good.

Other terms you may have heard before are green, ethical, or values-based investing. With so many definitions and not much agreement on how to apply them, it’s important to look more closely at these investments to make sure they really do align with your intentions and values. We’ll address these details in one of our next Life with Money installments.

Who is sustainable investing for and why does it matter?

ESG is one of the fastest growing parts of the financial markets, with an estimated $120 billion invested in sustainable investments in 2021 compared to $51 billion in 2020, which in turn increased tenfold from 2018 and 25-fold from 1995.
Sustainable investing is considered largely driven by Millennials and Gen Z cohorts (born between 1980-2010) and their beliefs around issues including climate change, sustainability, and social justice. But research suggests that sustainable investing appeals to a wide range of investors with various interests and motivations that extend beyond the desire to make a positive impact.

Incorporating ESG data can provide a more complete view of a company, shedding light on its health and impact beyond its balance sheet. A United Nations report from 2005 called Who Cares Wins summarizes it well:

“In a more globalized, interconnected, and competitive world, the way that environmental, social, and corporate governance issues are managed is a key part of companies’ overall management quality that’s necessary to compete successfully.”

“Companies that perform better with regard to ESG issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action, or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate. Moreover, these issues can have a strong impact on reputation and brands, an increasingly important part of company value.”

This is important for distinguishing the ideological, value-based (and therefore often politicized) motivations for sustainable investing from the desire to understand investment risks and opportunities through an analytical framework.

As mentioned above, in the next few weeks we’ll provide additional details about sustainable investing, including what investments are currently available, as well as some of the limitations of this type of investing and arguments made against the ESG trend.