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Sustainable investing: Strategies and best practices

28 Nov
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As the seasons grow hotter and more unpredictable, and the threats of climate change evolve from possibility to observable reality, consumers are embracing sustainability and searching for eco-friendly options in the market.

Consider the following statistics:

  • 84% of consumers in a study recently bought a sustainable product1
  • There has been a 71% worldwide increase in searches for sustainable goods since 20162
  • 85% of people have shifted toward greener purchasing trends globally3
  • 60% of people surveyed in a recent report would pay more for products that utilize sustainable packaging4

Saying the sustainability market has room to grow is an understatement. Yet, as investors work to discover practical ways of investing in the future, it can be challenging to know what the best moves are. Learning about sustainable and ethical investing now prepares you for the forthcoming opportunities brought on by a world grappling with climate change and allows you the opportunity to be a part of positive change in the market and the world.

Read on to explore several of the advantages and best practices associated with sustainable investing.

The benefits of sustainable investing

The term ESG stands for Environmental, Social, and Governance, and it refers to a set of criteria that investors and organizations use to evaluate a company's performance in these three key areas.

Sustainable investing allows you to align your investing strategy with industries and companies that value and promote the overall health of humanity and the environment. Additionally, sustainable investing has the potential for many financial benefits, which is why asset managers are expected to increase their ESG-focused institutional investment by 84% to almost $34 trillion by 2026.5

Professional investors maintain active, sustainable investing portfolios for many reasons, including:

  • Competitive financial returns: Contrary to the misconception that sustainable investments underperform, studies show that, all other things being equal, sustainable investment funds perform just as well as others and even offer a 20% lower downside risk6
  • Long-term perspective: Since sustainability products and practices are still evolving, sustainable investing focuses on long-term objectives; investors who focus on the long term and hold investments for a greater amount of time decrease their risk of booking losses7
  • Innovation and opportunity: Sustainable investing promotes innovation in clean energy, technology, and healthcare industries, meaning investors can capitalize on unique growth opportunities

This myriad of benefits shows why sustainable investing has such a bright future.

Sustainable investment products

From individual stocks to real estate investment trusts (REITs) and exchange-traded funds (ETFs), there is a diverse range of products for investors to consider.

ETFs are investment funds that represent a diversified portfolio of assets, such as stocks, bonds, or commodities. REITs, on the other hand, are companies that own, operate, or finance income-generating real estate properties and allow investors to invest in a diversified portfolio of real estate assets.

Here’s a look at how some of these investment products apply to sustainable investing:

  • SRI funds: Socially responsible investing (SRI) funds are ETFs that invest in companies with a particular dedication toward ethical, social, or environmental values
  • ESG funds: ESG funds are ETFs with holdings in companies with high ESG ratings
  • Green bonds: These are debt securities issued to raise funds specifically for environmentally sustainable projects or initiatives
  • Green REITs: Real estate investment trusts are companies that own, operate, or finance income-generating real estate properties; they specifically invest in properties designated for eco-friendly projects or those that have overall high ESG ratings8
  • Individual stocks: Investors may consider strategies like carbon footprint investing, which favor individual companies with robust measures for limiting carbon emissions9

As with any investment product, research, knowledge, and risk assessment are vital in choosing the right sustainable investment strategy.

Sustainable investment strategies and best practices

Adhering to sustainable investing best practices will guide you in achieving your financial and ethical goals.

The foundation of sustainable investing begins with defining clear financial and non-financial goals. Define your values, sustainability priorities, and financial goals to establish a framework for strategic planning and investment decisions.

If you need inspiration, look into impact investing, ESG investing, and SRI investing. These philosophies are similar but offer various nuances in priorities and practices.10

Engage in diligent research that keeps you updated on evolving sustainable investing principles, trends, industry developments, and the latest ESG investing data. Let your research guide you as you conduct periodic reviews of your portfolio.

Additionally, remember to avoid greenwashing: a company’s use of deceptive practices that falsely portray its products or services as environmentally friendly. You can avoid investing in businesses that engage in greenwashing by scrutinizing a company's sustainability claims and ensuring that it adheres to sustainability best practices.

Since sustainable investing has been evolving for years, various strategies have emerged, including:

  • Positive screening: This approach involves selecting and including companies or assets in a portfolio based on their strong adherence to ESG criteria or alignment with specific sustainability values
  • Negative screening: This technique excludes companies or industries, such as arms and fossil fuel companies, from an investment portfolio based on their failure to meet specific ESG criteria or ethical standards
  • Portfolio tilt: Deliberately overweighting or underweighting certain stocks or assets within a portfolio to emphasize sustainability or ESG factors
  • Activist investing: An approach in which investors actively engage with companies in their portfolio, often through shareholder activism, to advocate for changes in company policies
  • Themed investing: Concentrating investments in companies or assets related to specific ethical themes, such as clean energy, water conservation, or gender equality

Education is the key to researching and understanding ever-changing trends, strategies, and best practices for successful investment in sustainability.

Corporate governance in sustainable investing

In the context of sustainable investing, corporate governance emerges as a pivotal factor influencing how companies manage Environmental, Social, and Governance (ESG) factors.

As investors increasingly recognize the significance of sustainability in their portfolios, corporate governance practices become a critical aspect of evaluating potential investments.

Here are key considerations related to corporate governance in the context of sustainable investing:

ESG criteria integration

Corporate governance issues: Sustainable investors closely examine corporate governance structures to identify potential issues that may impact a company's adherence to ESG criteria. Governance practices, such as board diversity, executive compensation tied to sustainability goals, and transparent reporting mechanisms, are essential factors in this assessment.

Shareholder engagement

Shareholder activism: Investors engaging with companies through shareholder activism can drive positive change. This involves actively participating in corporate decision-making processes to advocate for enhanced sustainability practices. Shareholder engagement fosters a collaborative approach, encouraging companies to align their strategies with sustainable goals.

Environmental benefits

Renewable energy and green business models: Corporate governance that prioritizes environmental benefits, such as the adoption of renewable energy sources and sustainable business models, reflects a commitment to long-term sustainability. Investors seeking companies with a positive environmental impact often look for governance structures that support and drive these initiatives.

Board oversight on ESG

ESG Considerations at the board level: Effective corporate governance ensures that boards have oversight and accountability for ESG considerations. This includes establishing committees or structures dedicated to sustainability, emphasizing the integration of ESG factors into strategic decision-making processes.

Transparency and reporting

ESG reporting practices: Transparent reporting on ESG metrics is a fundamental aspect of sustainable corporate governance. Companies committed to sustainability regularly disclose their environmental and social performance, enabling investors to make informed decisions aligned with their values and goals.

Community and social responsibility

Community investing: Sustainable corporate governance extends beyond traditional business operations to include community and social responsibility. Investors may favor companies with governance practices that contribute positively to the well-being of local communities, aligning with broader impact investing goals.

As sustainable investing continues to evolve, corporate governance will remain a critical factor influencing investment decisions. Investors committed to positive environmental and social impact, including those engaging in sustainable investment strategies, should scrutinize corporate governance practices to ensure alignment with their sustainability objectives.

In conclusion, integrating corporate governance considerations into sustainable investing strategies enhances the ability to create positive change in the business world while achieving financial goals. As the landscape of sustainable investing expands, the emphasis on robust corporate governance practices becomes increasingly significant for those exploring various sustainable investment assets.

Prepare for a career in sustainable investing with an online MBA from the University of Kansas

Like the market, the sustainability industry constantly fluctuates, and investors need to know how to take advantage of opportunities and weather storms when they happen. That’s why continued education is so vital to success.

The University of Kansas’ top-ranked online MBA program will teach you all the current trends, insights, and strategies to get started in a career that involves sustainable investing.11

Connect with an admissions outreach advisor and discover how to get an MBA on your own schedule.