What Is Sustainable Investing?
November 11, 2021 | Financial Industry
The world of investment is changing. As more impact-conscious investors and millennials enter the markets, they emphasize improving this world as you improve your financial portfolio. For many investors, the approach to investing is changing. While avoiding certain “sin stocks,” including tobacco, weapons, alcohol, and gambling investments, has decreased, a more holistic, proactive type of investing has emerged – sustainable investing.
Read on to learn more about sustainable investing and how this kind of proactive, thoughtful investment positively affects the world as it yields financial returns.
What Is Sustainable Investing?
Sustainable investing is a path for individual investors who want to build their portfolios in a socially responsible and ethical way. The goal is to use responsible investing in promoting corporate responsibility, environmentally friendly causes, and a positive impact on society while also yielding long-term financial returns.
Sustainable investing strategies consider various environmental and social factors and corporate governance concerns before any money or other resources are invested in a company or venture. Sustainable investing is also known as ESG investing (environmental, social, and governance).
Currently, one-third of the investments in the United States are handled according to sustainable investment strategies, totaling $17.1 trillion in investments.
Why Sustainable Investing Is Important
Sustainable investment strategies are more important today as more first-time investors and millennials express the desire to support and promote companies that share their values. The interest in sustainability, diversity, and impact investing encourages companies to embrace social and environmental principles as they grow.
For investors, becoming familiar with sustainable investing practices is essential, especially as more business owners shift their focus to affecting social change and dealing with environmental issues such as climate change and pollution.
Environmental Impact
Sustainable environmental investing may include businesses that improve and promote energy efficiency through sustainable means. They also responsibly source raw production materials, promote environmentally friendly production, prioritize recycling and low carbon emissions, and limit waste production.
Many ETFs focus on renewable energy and environmentally sustainable practices, including:
- ALPS Clean Energy ETF (ACES)
- First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)
- Invesco Solar ETF (TAN)
- Invesco WilderHill Clean Energy ETF (PRW)
- iShares Global Clean Energy ETF (ICLN)
Mutual funds are another option for sustainable energy investments. Among the most significant sustainable funds are:
- Green Century Balanced Fund (GCBLX)
- New Alternatives Fund (NAEFX)
- Pax Global Environmental Markets Fund (PGRNX)
Social Issues
Sustainable investing with an eye toward social improvement and impact focuses on businesses that consider social issues ranging from gender equality and wealth inequality to healthy environments for workers worldwide and demonstrated dedication to meeting their charitable goals. Focusing on social impact themes identifies which companies are committed to promoting diversity and inclusivity in the workplace.
Based on its total assets, the largest ETF fund that focuses primarily on gender inclusivity and diversity is the SPDR SSGA Gender Diversity Index ETF (SHE).
How to Find Sustainable Investing Ideas
If you are interested in sustainable investing, the first step is research. Many financial analysts and investment groups publish lists of the top-rated stocks for sustainable investing. Reviewing these lists based on ESG criteria can help you discover potential investments that fit into your portfolio strategy.
Another option is investing in ESG funds, which many brokerages offer to investors looking to engage in sustainable investing without manually picking their stocks.
You can also seek investment advice and guidance from an ESG financial advisor. An ESG financial advisor can help you bring your personal goals to bear on your financial portfolio, tailoring it to suit your sustainable investment goals and your financial goals.
There are several sustainable investment strategies to pursue, whether proactive or reactive. For example, if you feel strongly about climate change and pollution, a proactive investment strategy would be to invest your money in the clean energy sector and in companies that produce products with low or no carbon emissions. You may also choose not to invest in companies that produce oil or gas or use fossil fuels to produce their products – a reactive investment strategy.
Whether you are working with a financial advisor or selecting stocks and funds for investment on your own, you need to perform a fundamental analysis of those companies and look to the advice and ratings made by professional financial analysts and fund managers. Experts rate these companies and funds based on their ESG scores, which gives you a brief look at the sustainability of the proposed investment.
ESG Scores
Determining the sustainability of an investment depends on the three ESG factors. The ESG score measures the environmental, social, and governance factors.
Environmental considerations focus on the effect of a company’s ventures on the environment, both short-term and long-term. This includes climate change, carbon emissions, water conservation, land stewardship, and the volume and handling of resources and waste.
Social considerations reflect the impact that a company’s actions and advocacy have on society. ESG analysts look at a company’s involvement with social issues, their stances, and how they produce positive change in the community. Social impact issues may include global human rights issues, racial diversity, inclusivity in the workplace and the community, health and safety issues, and community involvement and engagement.
The third issue is corporate governance, which focuses on how companies or ETFs are managed to promote positive change. Governance includes quality reviews of professional management within a company and the board of directors. It also examines diversity issues, executive pay, the rights of shareholders, and transparency and disclosure issues, including any contributions made to political campaigns or causes.
Growth of Sustainable Investing
One of the primary reasons that sustainable investing has grown, and continues to grow, is that investments in ESG companies have outperformed investments in their counterparts. The lower volatility of stock performance in ESG companies coupled with an increase in positive equity returns has led to a rise in sustainable investments across all 12 industries.
Interest in sustainable investing is also increasing across all age groups. According to a pool conducted by Morningstar, 72% of adults in the US are at least moderately interested in pursuing sustainable investing, with 21% expressing “high interest.” Attitudes toward sustainable investing are also changing as the social and environmental issues involved become more critical.
ESG and sustainable investing are projected to grow substantially over the next decade, with millions of dollars in investment opportunities emerging.
Top ESG Rated Companies
Here are some of the top-rated ESG stocks for sustainable investing:
Nvidia (NVDA)
Nvidia has an excellent AAA ESG rating. The semiconductor stock was noted by MSCI ESG Research ranking service as a “leader” in three separate ESG issues: corporate behavior, corporate governance, and human capital development.
Nvidia is a leader in philanthropic giving, with more than $25 million going to support more than 5,000 nonprofits worldwide.
Salesforce (CRM)
Salesforce believes that business should be a platform for social and environmental change, and they are delivering on that. This company also holds the highest ESG rating of AAA, offering customers a carbon-neutral cloud and boasting net-zero carbon emission for its global operations.
Adobe
Adobe partners with many organizations that share their commitment to diversity and opportunities for all. They have awarded nearly $3.5 million in creativity and STEAM (Science, Technology, Engineering, Arts, and Math) scholarships to deserving students. Supporting more than 60,000 nonprofits through charitable donations and working toward 100% renewable energy use without offsets is why Adobe is one of the top ten ESG-rated companies around.
iRobot
iRobot stands firmly in the top ten ESG-rated stocks as they bring the same innovative spirit that has helped them push boundaries in robotics to impact the environment and the community positively. The company consistently minimizes environmental impact and has even developed an award-winning battery recycling program, demonstrating its dedication to positive and sustainable production.
Intuit
Belief in the opportunity for individuals to prosper is at the heart of everything Intuit does. With diverse financial platforms and programs designed to help people restore and maintain their economic welfare, Intuit continues to seek proactive ways to solve problems and build a better future for their employees, customers, and the communities they serve.
Social issues of diversity, inclusion, equity, job readiness, job creation, and environmental and climate change are some of the sustainable investment programs that Intuit supports.
With more companies listening to investors and increasing their awareness of social and environmental issues, sustainable investing will continue to grow and expand into the future.
How Redi2 Supports Firms Focused On Sustainable Investment
Redi2 Technologies, Inc. is the premier revenue management platform for the financial service industry around the world. From billing and invoicing to comprehensive revenue management, we provide the advice, guidance, and software to handle your financial management firm’s billing and revenue management operational complexities.
We’ve set a standard for how billing firms service their clients and pioneered successful financial billing solutions that enable our clients to collect their revenue faster. We stand by our clients as they navigate the growth in ESG demand and provide the tools to enable them to stay ahead of these important dynamics within the industry.
