A guide to sustainable investing

For most investors, chasing high returns is the ultimate investment goal. And it makes sense, your hard-earned money deserves the best possible investment results. But what if there is a way to accumulate wealth while still doing some social good?

Welcome to responsible investing with sustainability.

In sustainable investing, investment capital is directed to organizations that seek to tackle climate change and environmental destruction while advocating for corporate responsibility.

This philosophy for responsible investment takes into account a firm's environmental, social, and corporate governance (ESG) factors. So, an investor's dollars are used to promote positive social changes and corporate responsibility while ensuring long-term financial gains.

Sustainable investors, or ESG investors - (as they are also known) — seek stocks of companies that act responsibly towards the environment, are good corporate citizens and are headed by socially conscious and accountable managers.

Difference between ESG investing and sustainable investing

ESG and sustainability are closely related, but where ESG investing looks at how a company makes a decision, sustainability takes into account the impact of those decisions.

But does this way of responsible investing add greens to your wallet? To better understand it, let's look at how these investments were carried out.

The Old Ways

The traditional way of investing was about approaching stocks that would or were likely to generate a profit. So, if a tree is cut, it needs to be bought. If the land is purchased, it needs to be developed. Same way, animals are raised to sell. This kind of thinking has led to development but also resulted in deforestation. Most experts will likely state that such an approach has proven to be detrimental to the environment and has resulted in problems like global warming, drought, deforestation, pollution, extinction of a few species of animals, etc.

The New Ways

Companies are paying close attention to these major environmental concerns and, more importantly, have shown interest in making improvements. This has resulted in companies finding ways to operate in a manner that is environmentally friendly. They are focused on solving problems that the industry itself creates in the natural world. And today, it is no more some small companies wanting to make a difference but bigger firms looking to play a part. One can also keep a close watch on Share Baskets focused on sustainable investing.

But why should investors look at sustainable investing?

Because finding a solution to the world's environmental problems is big business. The efforts taken to reduce the world's dependence on fossil fuels have opened doors to several other enterprises. This includes a range of enterprises like wind farming, e-vehicles, alternative fuels, etc. And these are genuine, measurable efforts taken by corporations. Consider general electric partnering with the U.S. Department of Energy to design and manufacture wind turbines or Tesla building electric cars.

Moreover, companies are reclaiming brownfield industrial sites, creating products from recycled materials, practicing sustainable farming, building energy-efficient appliances, and finding ways to reduce air pollution for a greener future. These firms are seeking to find solutions, be environmentally friendly operationally and still earn a profit.

And for investors looking to make responsible investments and be associated with firms that share their values, following a sustainable investment strategy can be a good strategy. So let's learn some more about its pros and cons:

Pros of sustainable investing

For all the social value ESG investing brings, they also protect investors from any fallouts due to the unethical or risky behaviour of a company, which could have an impact on the bottom line. Take BP's 2010 Gulf of Mexico oil spill, which impacted the company's stock and costed them billions.

The ESG Impact

ESG investors are increasingly influencing large institutional investors' investment choices. As per a US SIF Foundation report, investors held $17.1 trillion in assets in accordance with ESG principles in 2020.

Today, businesses that have an ESG mindset are gaining more traction, and investment firms are keeping a close eye on their performance, with top investment firms coming out with yearly ESG reports. Some have even created ESG funds for investors to responsibly invest in.

However, the goal of ESG investing is about more than ticking the right boxes but is whether a company's goals and projects are realistic, measurable, and actionable for a sustainable future.

Cons of sustainable investing

However, the downside to ESG investing is that investors cannot hold the gambit of stocks available in the market. Remember, tobacco, defence, which has historically delivered well-above-average returns, even during recessions, will not be a part of the investor's portfolio. However, making investments that meet your values is a small sacrifice.

The concept of sustainable investing has taken a while to generate momentum, and its outlook looks brighter as the concern for the environment continues to grow.

— Vijay Valecha is the chief investment officer at Century Financial.

• KT Network