What is Sustainable or ESG Investing?
When it comes to Sustainable or ESG investing, many different terms get used interchangeably and as a result, leads to a lot of confusion. It’s understandable because the concept is relatively new.
I view Sustainable Investing as the umbrella and underneath that, you have ESG (Environmental, Social and Governance), Impact, Thematic and Values-Based investing among other forms as the concept continues to evolve. These are not mutually exclusive. Something could qualify as Thematic and also be Impact investing.
In essence, Sustainable Investing is an investment strategy that considers other factors outside of traditional financial metrics used to value a company or an investment.
Why would you choose Sustainable investments?
If there are causes you feel strongly about, in addition to donating towards those causes you can use your investments to help make an impact. You could combine Impact and Thematic investing to help address issues you care about.
An added benefit is when you do this, your investments are no longer just a means to “make money.” You feel a deeper connection to your investments. This could lead to less anxiety during down periods resulting in less panic selling.
It can also be a way to gain an edge. It’s practical to expect a company with sustainable practices, including happier employees and less scrutiny from environmental regulators to be a company that outlasts its competitors cutting corners for short term gain at long term expense. See the below Ted Talk given by Karina Funk, the portfolio manager of Brown Advisory Sustainable Growth fund.
How do I integrate Sustainability into my investments?
Most investments considered to be sustainable tend to be concentrated in certain areas. As a result, the integration of sustainable investments into your portfolio can be tricky.
There are many different asset classes under Modern Portfolio Theory that suggests the way a prudent investor diversifies his or her portfolio. With the tendency of sustainable funds to be concentrated in a small number of asset classes, that leaves a couple of ways to go about strategy implementation.
- Find great choices, and whatever boxes are left unchecked, check them with best available non-mandated funds.
- Use a separate account with the sole purpose of being your sustainable portfolio.
Breaking Down ESG
Environmental – One way to attack this could be to screen investments to exclude companies known to produce adverse effects on our climate.
Social – An example of this could be to exclude companies with labor issues or invest in companies known to treat their employees well.
Governance – Invest in companies with a diverse board of directors or exclude companies with excessive executive compensation compared to other companies in their industry.
If you are interested in sustainable investing or have questions on how to get started, please send me a message below.