What Is Sustainable Investing?

What Is Sustainable Investing?

Sustainable investing refers to investment practices that seek both competitive investment returns and positive impacts through the use of environmental, social and governance (ESG) criteria. Sustainable investing is sometimes referred to as ESG investing, socially responsible investing, impact investing, social investment, and green investing. The terms do not always overlap: there are different nuances or focuses to each.

Business has always applied some kinds of ethical or sustainable screens, however slight they might seem by modern standards. ESG as we are now developing it applies a deliberate and systematically determined set of standards to screen investments for inclusion or exclusion. While there are several different approaches, there is no industry standard at present. Different ones compete for adoption in the hope of becoming the dominant guiding paradigm in the industry.

Sustainability in its modern form developed alongside increasing awareness of the need to involve business in creating a fair and livable world. It is now a multitrillion-dollar practice in business. Many companies now proudly advertise their adherence to sustainability principles. The related notion of stakeholder capitalism—the idea that a business must meet the needs of all parties involved (including employees, customers and society in general) and not just the priority of shareholder primacy—is now an established principle as well.

The three parts of sustainable investing involve the following:

• Environmental criteria examine the relationship between a business and the physical environment. Major concerns in this area include climate change, energy use, pollution, depletion of natural resources, and the passing of costs onto the environment (this last one is called cost externalization in the industry).
• Social criteria deal with how a company relates to its human element—that is, employees and customers, supply chain, and the communities it is involved in. Major concerns include equality in the workplace, human and animal welfare/rights, diversity and inclusion, and protections for consumers.
• Governance criteria consider a company’s leadership with respect to its internal business practices, that is, shareholder relationship, pay issues, and the like. Major concerns include business ethics, compensation, employee relations, and the makeup of the board of directors.

Every business is affected in some way or another and to some extent by these ideas.

It is subjective

While there is much agreement in the grand scheme on what constitutes sustainability, the particulars can be hotly debated. For example, is a business that uses sustainable materials "socially responsible" if it also lacks a diverse workforce? Can a gun manufacturer be considered a conscientious steward of society? These are just some of the many questions being debated.

Much as some companies rate bonds on features important to investors, there are ESG ratings providers that do the same to provide a comprehensive and logical way of determining what qualifies as sustainable and to what extent it is being practiced. The ratings conferred on companies are not standard; investors therefore find, for example, that company X is rated "excellent" by one ratings provider but "below average" by another. The relative newness of sustainability ratings ensures that it will be a while before any consensus is reached.