Investor Motivations to Invest Sustainably
Investor Motivations to Invest Sustainably
Systemic issues such as environmental degradation, climate change, and inequalities have energized investors to use the free market to make the world a better place. This, the reasoning goes, not only improves the world, but ultimately improves investments themselves. How does it work?
Improving the world
Investor motivations to improve the world exist on a continuum of two broad categories: do no harm and make a difference. It should be noted that within the portfolios of sustainable investors is room for both approaches.
Do no harm. There has never been a shortage of investment opportunities to stay away from, and investors often know in advance which investments they want to exclude from their portfolios. Major examples of such opportunities include products, services and companies involved in the following:
- Alcohol, tobacco, and other recreational drugs
- Weapons
- War
- Gambling
- Sexually explicit entertainment
- Products tested on animals
- Carbon-based energy
- Products that pollute the environment
- Questionable labor practices and working conditions
- Underrepresenting marginalized populations
- Questionable human rights records
- Political or social goals with which an investor does not agree
- Lack of proactivity on sustainability issues
Make a positive difference. On the other side of the coin, simply avoiding "harmful" investments is not enough to many investors—they want to put their money where their conscience is so they can know they are helping to solve big problems. To that end, investments can seek out positive impacts while returning a good yield. Such investments focus on opportunities like these:
- Education
- Pharmaceuticals, medical equipment and hospitals
- Government programs for marginalized populations
- Health foods and lifestyle products
- Sustainable energy
- Sustainable agriculture
- Environmental rejuvenation, such as reforestation
- Recycling or repurposing of products
Investors buy stocks, bonds, mutual funds and other securities that invest in these areas. Some individuals start their own businesses that reflect their priorities.
Improving investments
"I’m all for saving the world, but I don’t want to lose money." This is a familiar complaint from wary investors who hesitate to jump in for fear that their portfolios will suffer. Luckily for them, a major selling point is that sustainability may improve investments themselves. Accumulated research has found positive correlation with investment metrics such as return on equity, return on invested capital, and sales volume. Research by institutions such as BlackRock, Goldman Sachs, Merrill Lynch, and Harvard University has added to the weight of the evidence.
The key is how a company’s internal systems change when it adopts sustainability strategies. A focus on the bottom line in the short term is replaced by a longer, wider view that sees how the company operates in a broader set of contexts. Among the factors involved in this kind of systemic change:
- Longer-term thinking
- Retention of employee talent pool
- Customer loyalty
- Risk reduction
- Innovation
- Awareness of their actions on their market
- Awareness of operational issues
- Resource efficiency
- Attention to legal vulnerabilities
- Increased employee productivity
- Reduced interference from regulators
- Ability to find new markets
- Ability to influence and mold consumer preferences for the long term
- Market leadership
- Product or service leadership
The companies that get in on this systemic change have a sales advantage that can translate into an advantage in investment performance. Each of these competitive edges can result in risk reduction overall (such as lower legal and compliance expenses), further strengthening a company’s internal system and boosting sales.
For the investor concerned with performance, all of these factors can translate into rising equity prices and stronger bond ratings.
