Sustainable investing is now globally gaining momentum, as investors demand more accountability for ESG or Environmental, Social and Governance issues. Investors are also keeping a watch over the companies who are making efforts to fight global warming/climate change according to the Paris Agreement. In this brief guide, we will take a look at the different terms as well as the role of sustainability investors and the opportunities for them to invest.
Brief guide for sustainability investors
First, let us look at the different terminology which you might come across while looking to invest in sustainable way:
1. SRI (Sustainable, Responsible and Impact investing)
SRI is a form of investment which takes into consideration the ESG criteria while generating valuable financial returns and creating social impact.
In socially responsible investment, negative screening is used to screen out companies which produce/sell toxic substances such as tobacco, or engage in ecology damaging activities. Companies which violate the human rights of people are also not selected by sustainability investors. But a positive criterion is also not actively sought out. Shareholder engagement and organizational governance are considered when SRI investments are chosen.
SRI spans a range of asset classes and producers such as mainstream finance products like stocks which are traded publicly, alternative investments, fixed income, venture capital, private equity or ETFs.
Being a sustainability investor you can invest in governments and companies which hold the values important to investors. These can include consumer protection, environment, religious beliefs, human rights and employee rights.
2. Community investing
Within SRI, community investing is the fastest growing sector, with $61.4 billion invested in managed assets. In this, the capital of the investors is projected towards communities which have been underserved by traditional finance institutions, and provides the recipients with low interest loans, as well as community services such as healthcare, education, child care and housing.
3. Impact investing
Impact investing is an option for sustainability investors. It is slightly different from SRI as it seeks to create positive social impact through financial investment. The investors not only look at the negative impact profile of companies, but unlike SRIs, they also consider the positive impact profile, which the companies they invest in have to report at the end of the year.
This form of investing is tied up in building markets in sectors such as renewable energy, ‘cleantech’, and sustainable agriculture. The returns generated in impact investing may be market or even sub-market rate.
4. Ethical Investing
In this, investments are selected according to the sustainability investors’ personal values or beliefs. Investors who want to invest in particular movements or causes can do so with ethical investing. They may rule out investing in industries such as weapons or firearms industries or divesting from fossil fuel industry.
5. Crowdfunding
Most people are familiar with the concept of crowdfunding. It is one of the most popular investment options nowadays. Investing companies or individuals use the internet to invest money directly in sustainable startups. The returns might in terms of financial returns or the product. There are many crowdfunding platforms online.
What is Shareholder Advocacy or Shareholder Engagement?
Shareholder advocacy or engagement is a vital part of socially responsible investment. It means that sustainability investors have a say in influencing the corporate decisions of companies which they invest in. This results in corporate being answerable to their investors and practices as well as policies are influenced for the betterment of society and the environment. Corporates improve their long-term value as well as financial performance.
The investors in SRIs accomplish ESG goals through dialogues, increasing public awareness for their issues through the use of media, and filing resolutions to gain the vote of shareholders in corporate decisions. Even the process of filing resolutions brings an issue to the forefront and company managers can take the necessary steps to resolve the issues which end in being beneficial for the environment and society.
For instance, from 2016 to 2018 first half, over 200 institutional investors/money managers who controlled approx $1.76 trillion in assets filed/co-filed shareholders’ resolutions on issues related to ESG. ‘Proxy access’, ability to nominate directors of corporate boards, disclosure as well as corporate political lobbying and spending were issues on which much of the resolutions were filed. Climate change, fair trade, fair labor as well as pay, human rights and sustainability reporting were issues which were also raised.
The shareholder’s engagement can put pressure on corporate to conduct themselves in a socially responsible manner.
Which sectors is the fastest growing in SRI?
Community investing
This sector has seen rapid growth in the past few years, almost doubling the assets from 2014 to 2016, and growing more than 50% between 2016 to 2018. The largest growth in this sector has been in community development’s credit unions.
Alternative ESG
Alternative ESG assets have tripled from 206 billion to 588 billion dollars with the amount of funds increasing from 413 to 780. These include private equity and property funds, hedge funds, REITs and venture capital.
Registered Investment companies
ESG funds increased to 7.4 billion dollars from 3.5 billion dollars. The funds’ number increased by a whopping 176%, and the total of SRI funds now are 636, giving sustainability investors a good amount of choice in sustainable startups as well as established sustainable companies.
Reasons why number of sustainability investors have increased
Better and more data
As there is more data available, investors who want to know how their investments are creating a difference can find out. The trend is for increased demand of information for comparable and verifiable data which can influence the investment decisions of investors.
ESG’s value has increased in Fixed Income Investing
In fixed income market also, socially responsible investment has become important. Investing companies such as PIMCO, one of the biggest fixed income investors has become vocal for bonds which support the United Nations Sustainable Development Goals. This industry is increasingly looking at corporates’ ESG performance as risk indicator.
As the sustainability movement picks up pace, green bonds will be more easily accessible as corporate think creatively to integrate sustainability in their business strategy.