Understanding Sustainable Investment
Sustainable investing refers to deploying capital in ways that aim to achieve financial returns while promoting long-term environmental or social value. Combining traditional investment approaches with environmental, social, and corporate governance (ESG) insights has led to investors generating more comprehensive analyses and making better investment decisions.
Sustainable investing ensures firms aren’t judged solely on short-term financial gains but on a broader picture of what and how they contribute to society. Investors must think critically about investments’ potential impacts as they relate to environmental, political, and societal landscapes.
The contribution can be made through products, services, and/or operations or through projects financed across asset classes and in multiple sectors or themes. The positive contribution of an investment should not be outweighed by negative impacts from the same investment over the life of this investment. Investors can strengthen their positive contribution through active ownership, such as engagement for more sustainability in companies, sectors, geographies and projects they invest in.
The Sustainable Investment Sprectrum
There are several strategies business leaders can leverage when investing sustainably, including:
Negative/exclusionary screening: Excludes specific sectors, companies, or practices from a fund or portfolio based on ESG criteria
Positive/best-in-class screening: Encompasses investments in sectors, companies, or projects selected from a defined universe for positive ESG performance compared to industry peers
An investment’s sustainability impact is evaluated using ESG factors. Here’s a breakdown of what an ESG score typically consists of:
Environmental: A company’s impact on the environment, such as its carbon footprint, waste, water use and conservation, and the clean technology it uses and creates in its supply chain.
Social: A company or fund’s impact on society and how it advocates for social good and change. Analysts closely examine its involvement and stances on social issues, such as human rights, racial diversity within hiring and inclusion programs, employees’ health and safety, and community engagement.
Governance: How an investment firm or company is managed or “governed” for driving positive change. It encompasses reviewing the quality of its management and board, executive compensation and diversity, shareholder rights, overall transparency and disclosure, anti-corruption, and corporate political contributions.