Have you heard of sustainable investing yet? What about SRI, ESG, or impact investing? There’s a lot of buzz surrounding this type of social investing—and for good reason—and you might be a part of the movement without even realizing it.
What is sustainable investing?
Sustainable investing falls under the umbrella of socially responsible investing, or SRI. Socially responsible investing means considering both the financial return and social and environmental returns of a company. It can be called green, ethical, impact, or responsible investing, but it all boils down to one thing: Is the company that you’re investing in doing good in the world while they turn a profit?
A person who chooses to invest in sustainable companies may eschew a traditional fossil fuel manufacturer in favor of one that produces clean energy.
Sustainable investments consider three factors: Environment, Social, and Governance, or ESG.
An environmentally friendly investing goal can include companies that produce renewable and sustainable energy, enhance efficiency, source materials using eco-safe methods, use little or no hazardous chemicals in their production process, limit waste, and prioritize recycling.
Positive social investing focuses on companies that consider the impact on all stakeholders. Seeking gender equality, providing healthy working conditions and lifestyles, addressing the wealth inequality, and showing a commitment to charitable endeavors are all strong examples of social initiatives a company may choose.
Strong corporate governance systems require policies and systems that address conflicts of interest among stakeholders and include an independent board and audit committee that seek to protect shareholders over management.
Why invest sustainably?
You only need to read the news to see a few good arguments supporting sustainable investments. Our finite natural resources, ballooning population growth (9 billion by 2050), increased urbanization, and an aging and inadequate infrastructure all require attention. Objectively, we cannot continue to support industries and companies that are not addressing their environmental, social, and governance risks appropriately. The companies and projects that respond to the need for cleaner, leaner, and more sustainable products and services that will provide the best long-term shareholder value.
In fact, BlackRock, the world’s largest investment firm with $7 trillion in assets under management, will put sustainability at the center of its investment strategy moving forward. In a groundbreaking letter to his chief executives, BlackRock CEO Larry Fink said that his firm would avoid investments in companies that “present a high sustainability-related risk.”
The intention behind this shift in strategy is to encourage every company, not just energy firms, to rethink their carbon footprints. Regarding the climate crisis, he says, “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
Indeed. In 2018, 290 ESG exchange-traded funds were launched globally. According to a report by the Global Sustainable Investment Alliance, at least $30.7 trillion is now held in sustainable or green investments, up 34% from 2016.
This is a cultural shift as well as a financial one. More than ever, people are researching where their money is invested and what those companies are doing with it. And it’s not going unnoticed. Nike’s new CEO referenced as much in his inaugural speech, noting that “the consumer increasingly cares about sustainability. It matters to Nike and to consumers, who are looking to companies like Nike to lead.”
Are sustainable investments valuable?
Yes. Many investors believe that adhering to their principles means sacrificing some financial return, but that view is outdated. A study by Harvard Business School found that companies that developed organizational processes to measure, manage, and communicate performance on ESG issues in the early 1990s outperformed a carefully matched control group over the next 18 years.
A 2017 study by Nordea Equity Research (the largest financial services group in the Nordic region) reported that from 2012 to 2015, the companies with the highest ESG ratings outperformed the lowest-rated firms by as much as 40%.
In 2018, Bank of America Merrill Lynch found that firms with a better ESG record than their peers produced higher three-year returns, were more likely to become high-quality stocks, were less likely to have large price declines, and were less likely to go bankrupt.
How do you invest in sustainable companies?
If you’re someone who wants to put your money toward the causes you care about and grow your wealth over time, look no further than sustainable investing.
Choosing companies to invest in that align with your values is an incredibly personal and unique process. Our value systems are varied and complex, and undoubtedly no two are the same. Thankfully, investing apps like Public make it easy to research companies, their performance, and their industry.
Picking the sustainable stocks you wish to invest in is essentially no different than choosing any other, there is just an added layer of research involved.
To help make browsing stocks easier and more user-friendly, Public organizes public stocks and ETFs within Themes. That way, you can search for the brands under the umbrella of causes or business operations that you want to support most. Want to find companies with female CEOs? Search “Women in Charge.” You can also browse by themes like “Combat Carbon” for environmentally-friendly companies, or take a look at companies based in the USA who do all of their manufacturing in the States.
If you’re wondering what the difference between a stock and an ETF is, here’s a quick primer. An exchange-traded fund, or ETF, is a collection of securities that you can buy or sell through a brokerage firm on a stock exchange. They’re very similar to mutual funds, but with one twist: An ETF is bought and sold like a company stock during the day when the stock exchanges are open. Public includes both stocks and ETFs within Themes.
How do you know which sustainable investments are best?
Some investors look for industries that are going strong but still have room to grow. With government shifting toward more environmentally friendly policies in response to the climate crisis, many companies in Public’s Combat Carbon (featuring companies reducing their carbon footprint) and Green Power (solar, wind, biofuel companies) are poised for growth.
As with any company, just being nested in a particular industry does not ensure success. It’s still important to use the basics like P/E ratios. Price-to-earnings (P/E) ratios are the measure of a current share price relative to its per-share earnings. P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison.
You can also look at a company’s debt. The debt-to-asset ratio is a simple calculation that investors can use to make sure a company is solvent, is able to meet current and future obligations, and can generate a return on their investment. The information is available on the balance sheet that a company releases during its quarterly report. A debt load of less than 40% is ideal.
Most importantly, keep your ear to the ground. Add a few business and finance podcasts to your mix, follow the social media accounts of industry leaders, and create a news alert for the companies you purchased stock in. By staying on top of the news you’ll be a better-informed investor. Using the social aspect of the Public app is a handy way to learn about company activity from your peers and those in the know.
The bottom line
Investing in companies you believe in takes the notion of “voting with your wallet” to new a level. Paired with the fact that green businesses could become even more valuable as the global commitment toward environmental issues increases over time means you’re in a unique position to take control of your investments and the good they may accomplish.