Money Does Grow on Trees
A Guide into Sustainable Investing
By Tiffany Heravi
We have all heard the idiom, ‘money doesn’t grow on trees,’ probably spoken by a parent wanting to curb a child’s spending habits. Well, your mother might not be right on this one; the trees offer more green than just leaves. Sustainable investing is the practice of creating social impact through investing. For most people, ideas of investing and the stock market invoke the notion of greed and questionable Wall Street ethical standards. To the contrary, Socially Responsible Investing (SRI) takes into account environmental, social, and corporate governance (ESG) practices.
Make your money work for you. When trying to live a sustainable lifestyle there is great importance as a consumer in where you spend your money. Through sustainable investing you can choose to invest in funds and companies with goals that you support. The SRI movement started out screening companies based on ethical and moral criteria, which typically meant eliminating alcohol, tobacco, and firearm companies from a portfolio. However, this idea has expanded to focus on ESG factors which promote sustainability.
These days every major investment bank has some sort of ESG focused fund that you can invest in making the effort easy. The options run the gambit; there are funds that take care to avoid companies which use fossil fuels, identify companies with greater gender diversity, hold organic food companies, and so on. There is a wide and continuously growing range of products and asset classes including stocks, cash, fixed income, and alternative investments (which includes private equity, venture capital, and real estate). For a more grassroots approach, community investing is an option. This directs investments to disadvantaged communities through an array of initiatives including micro financing institutions, credit unions, and affordable housing projects.
Just like any other investor, sustainable investors want positive returns. There has too long been a misconception that sustainable investing means sacrificing returns; you can in fact advance positive social impact without compromising strong financial performance. It is estimated that today ESG investing comprises over $20 trillion in AUM, a continuously growing figure. People are increasingly realizing that these ESG factors do have financial relevance. Factors such as the amount of females on a company’s executive board, the degree of shareholder activism, and corporate culture have all been recognized as important to the future of a company. “High sustainability” firms outperform “low sustainability” firms over the long-term, according to a study done by Harvard Business School. This outperformance is both in terms of stock market and accounting performance, with the high sustainability group additionally exhibiting lower volatility.
What goes around comes around, and studies back up that good karmic notion. A 2013 study, entitled “Where and When Does it Pay to Be Good? A Global Long-Term Analysis of ESG Investing,” found evidence that European and North American stock portfolios with high E, S, and G scores showed a significant financial outperformance in the long run (with the exception of the combination of governance in Europe). The authors concluded that “investing in the top stocks and shorting those with low E, S, G scores implies even higher abnormal returns for the investor.” There were even overall abnormal buy-and-hold returns of up to 20 percent over an investment period of five years in the high ESG scoring companies. To be clear, investing hosts no guarantees and the proper research is needed to evaluate financial outlook but having a sustainable investment approach by no means bars an investor from sizable returns.
There is no one way to do it. Investors have the ability to pick and choose the values important to them, all the while keeping a risk tolerance they are comfortable with and reaching their goals. Investors are expecting better behavior from companies, and these ideals are translated politically as well to push governance frameworks that are increasingly transparent and globally focused. More than a fad, sustainable investing ideals will be increasingly integrated into the financial landscape as companies realize ESG factors are good for business, and millennials are growing more and more interested in showcasing their voice through their money. Good for society, good for the planet, and good for your sustainable bottom line.
Illustrations by Morgan Hartsfield
Disclaimer: The information contained in this article is for information purposes only. It is not intended to be investment or financial advice. Seek the advice of a qualified and registered securities professional and undertake your own due diligence.