Today, the human need to maximise income and profits has had catastrophic impacts on our environment, especially in the form of climate change. Due to these negative externalities, sustainability has become a concept that is increasing relevant to our current situation. You might be wondering how this impacts our investment management? Well, investing based on the solitary factor of higher returns is a very widespread notion and that's where the topic of "Sustainable Investment" comes into play. Here is a guide as to how you can become a more sustainable investor!
But first, you should understand what this term really means. Sustainable investing is also called Socially Responsible Investing (SRI) or Ethical Investing. "It refers. to the practices in which investors aim to maximise their returns while promoting long-term environmental or social value." Our behavior as investors directly impacts, either encourages or discourages, business behavior; thus, it is imperative for us to take into consideration the firms that consider the externalities of their production and aim to minimise it and act in a socially responsible manner. Some of the methods of sustainably making your financial portfolio are outlined below.
ESG Integration
Environmental, social, and governance factors (more commonly known as ESG factors) are factors that you MUST take into consideration when become a sustainable investor. ESG integration has been defined as "the process of including ESG factors in investment analysis and decisions to better manage risks and improve returns". So how can you find the ESG of a company? You can simply just find it on some popular ESG data providers, including MSCI, Bloomberg ESG and Sustainalytics. It is important to clearly read all this data and understand the companies behaviour in areas, such as waste management, their carbon and sulphur emissions etc. You may even look into some of the social factors like the diversity of employees. ESG scores are calculated from a range of 0 to 100, a score below 50 is usually considered a poor score, whereas, one above 70 is considered excellent. A firm that has a low ESG score and does not follow sustainable production methods may be a risky investment as they are more likely to be impacted by government regulations and taxes in the long run, which may hinder company performance.
Thematic Investing
The act of investing thematically is reliant on future trends and new "themes" that may arise due to global changes and developments. This strategy involves being updated with issues that are relevant currently and identifying industries or certain actions that are likely to become hot topics in the future. These may commonly include renewable energy (government are increasingly inclined towards subsidising these forms of energy and may also provide tax benefits to companies using such forms of energy), water conservation etc. Firms that are currently, or plan to, using such sustainable means are likely to be a more safe investment in the long run. However, it is also important to look at how effectively they are using these methods (look for trends or predicted costs and revenues once they use renewable energy sources for example) as you don't want to blindly support this cause.
Shareholder Advocacy and disinvestment
Purchasing shares in a company makes you a stakeholder of that company, meaning you will be impacted by any decisions they make. The larger the number of shares you have, the larger your stake in the firm, and the larger your right to exercise power over the behaviors of the firms. This is known as shareholder advocacy. When firms have their annual shareholder meetings, it is imperative that the topic of sustainability be spoken about and addressed clearly by the panel of directors. Therefore, you can also spread awareness about this as a shareholder in any company. However, it is unlikely that you would have shares that are of a large enough magnitude to exercise this right so disinvestment may be a better bet. Disinvestment, as the name suggests, involves selling the shares you own in a company and reinvesting that money in another more sustainable company. If awareness is spread and a large number of shareholders start to sell their shares due to the unethical business practices, it is likely that there will be a change.
Sustainability is a cause that is relevant today more than ever! Don't be scared to raise your voice and spread awareness about it. Be smart about your investments by looking at the larger picture. Stay sustainable!
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