Sustainable investment is a relatively new concept, but it has started to gain traction as industries gain more awareness of climate risks. Investment is the practice of putting your money into an asset which will hopefully appreciate in value – but what is sustainable investment?
What is Sustainable Investment?
Sustainability, simply put, is where an individual or organization aims to meet current needs and expectations without diminishing resources that will be needed in the future. It’s a way to look long-term. Sustainability mostly comes up in conversations about the environment and the growing need to use renewable resources, but it can also refer to the economic and societal future.
Sustainable investment opportunities are usually understood through the term ESG, which stands for environmental social and governance. ESG policies are the steps taken by companies to be more sustainable. ESG ratings agencies analyse a company’s ESG policies to work out if the company is a risky investment or not.
Social policies include health and safety plans and community outreach. Good governance practices are efforts made to stop bribery and other illegal practices. Environmental policies are most important for investors interested in climate change and many corporations now report on their carbon footprint and set targets to reduce emissions.
One important example of sustainable investment is investment in renewable energy. Timur Tillyaev, a sustainable investor, discussed in a recent article how energy transition is an area where investment can have a major positive effect. “There is clearly a growing will across the globe to drive energy transition and bring about a real change,” he said.
Tillyaev also named “wasteful investments” as one of the primary issues that prevent this necessary shift from fossil fuels. In contrast, sustainable investments, where investors put their money where their values are and support companies and causes that they agree with, are the way forward.
Catriona McInally, investment business development manager at Prudential, says sustainable investing is no longer niche. “Given the amount of money we have seen flowing into environmental, social and governance (ESG) funds, those dismissing sustainable investing as niche are increasingly being proven to be incorrect”, she writes.
Why Sustainable Investments Matter
Typically, the free market encourages companies and investors to follow consumer demands and profits ahead of anything else. While this has lined the pockets of many people, it is a relatively short-sighted way of working. Sustainable investments have a different focus.
Many of these non-essential goods and services are damaging to the environment and even to the economy in the long run as they use up resources which will be needed in the future.
Timur Tillyaev’s article, mentioned earlier, discusses how wasteful investments have led to energy shortages and price hikes. This has potentially devastating effects for the upcoming generations. Thus, sustainability isn’t just a question of saving the future, but it is also important for the present.
Customers can also play a role and change the nature of the markets. Currently, profits are found in cheap and wasteful industries. But by embracing sustainable investments, consumers can reward sustainable practices.
How You Can Be a Sustainable Investor
You can dip your toes into sustainable investing by supporting corporations and companies with good ESG policies which help the planet. Research which companies you buy from and find out whether they are focusing on sustainability or not. You can also check their record on environmental and social efforts.
And remember, this does not mean you will see lower returns on your investment. Maike Currie, investment director at Fidelity International, says “one of the enduring myths about sustainable investing is that doing good comes at a price. But investing in companies that rate highly on ESG factors can provide another opportunity to reach your financial goals while aligning with your values.”
You can make a real impact by investing sustainably in a more formal way. Look into a portfolio of environmental, social, and governance funds (ESG), as these companies have been audited and therefore more likely to be legitimate. This way, you can be sure that your money is being invested in companies that care about the planet. Anyone who chooses to invest in this way has a wide range of options for their portfolio.
If humanity doesn’t put sustainability first, our way of life will become untenable. Sustainable investing is one way to start making the right choices to protect our future.