Sustainable investments are not new. However, the winds of change started favoring this segment mainly after 2019. Backed by consumer activism aimed at addressing climate change, there have been noticeable changes in government policies. As a result, while many felt that investors might shy away from sustainable investments owing to the COVID-19 pandemic, businesses in this realm are actually witnessing interest like never before.
What Numbers Say
Interest in sustainable investments has increased significantly over the last few years, as illustrated through these numbers.
- 85% of all individual investors were interested in sustainable investments in 2019, up from 75% in 2017.
- With millennial investors, the number stood at 95% in 2019, up from 86% in 2017.
- The value of global sustainable investment assets increased by close to 35% from 2014 to 2018, from a little over $18 trillion to over $30 trillion.
What is Sustainable Investing?
Sustainable investing refers to making investments that stay true to your values while also expecting reasonable returns. Your investments might vary based on aspects you look for in businesses, causes that matter to you, or the desire to drive social change. Three primary ways through which investors of all types may make sustainable investments include:
- Exclusion. This implies excluding industries, businesses, or countries that are not in line with your values.
- Integration You may look forward to improving returns and reducing risk by integrating factors surrounding social, environmental, and corporate governance in your portfolio.
- Impact While you still look for financial returns, the driving force is to generate measurable impact – be it socially or environmentally.
Diversity in Options
Sustainable investing incorporates three distinct areas. These include:
- Socially Responsible Investing (SRI). While SRI is a broad ranging term, it essentially refers to steering clear of businesses that don’t align with your values. Examples include tobacco and alcohol companies.
- Environmental, Social, and Corporate Governance (ESG). Looking at ESG gives you means to evaluate how businesses treat the environment, the community, and their employees. The more a business prioritizes on these aspects, the higher its ESG rating. While some mutual funds look at ESG ratings as one among multiple factors, others make this a key parameter, thereby demonstrating higher levels of commitment.
- Impact. Impact businesses across different verticals tend to share a common goal. They wish to alleviate the quality of human life globally. This can be by carrying out medical research, treating water and making it fit for consumption, generating renewable energy, creating social awareness, and so on.
Debunking Myths About Sustainable Investments
You need to sacrifice performance
This is far from the truth because you may look forward to returns that are comparable to what you might expect from conventional investments. It is not without reason that sustainable investments are growing at a rapid pace.
Measuring impact is not possible
The basic premise behind impact investments is you get a clear indication of the impact you manage to generate. This is why an increasing number of funds and businesses are reporting their environmental and social impact.
Sustainable investments call for expertise
In the next year or two, you may expect sustainable investments to become commonplace. An easy way to hop on the bandwagon already is to look at what sustainable investment-centric mutual funds, exchange-traded funds (ETFs), and separately managed accounts (SMAs) have to offer.
The Need of the Hour
Focus now needs to be on technological innovations surrounding renewable energy, carbon capturing, and creating a circular economy. Some aspects that need immediate attention include:
- Encouraging producing food as close to home as possible, vertical farming, minimizing food surplus, and carbon capturing in farming
- Ensuring that industrial and agricultural water does not contaminate waterbeds
- Focusing on trapping heat emissions from methane and carbon
You get a sense of purpose when your investments are in line with your values. While you still stand to make money in the process, the satisfaction of doing right by others comes as a much deserved perk. If you think that making sustainable investments is up your alley, consider going the deal scouting way to determine what options work best for you.