What is Sustainable Investing? Why it’s time to invest in socially responsible business
22nd October 2019
Gavin Jones See profile
Recently I was talking to the head of sustainability for a global company about the rapid societal change after David Attenborough’s Blue Planet, and those emotive images of plastic straws in the ecosystem. While he agreed this was heartening, his view was that it hardly scratched the surface of the potential impact of the world’s current activities on the environment.
With certain governments taking climate crisis off their agenda, he felt that companies had taken on some responsibility for change, and it was now important for businesses to have strong environmental and social values. This was of course partly to comply with regulations, but also so that business brands could be aligned with the views of their customers.
The common media portrayal of ‘big business’ is often contrary to this, which highlights the complicated nature of environmental sustainability.
Investing for the future
For some financial planners including ourselves, the main aim is to ensure that investors’ income and assets continue to maintain their long-term lifestyle – Or put simply, to make a profit.
The question, as investment managers ourselves, is, can we efficiently invest in sustainable businesses and still meet the financial goals of investors with the same level of risk?
What about investing in oil companies or similar?
Social or environmental investing has been around for a long time, but it has often involved excluding individual companies or business sectors because of personal preference. This is more complicated than it first seems. If you ask people what they want to exclude, their first choice may well be the major oil companies. So why do many environmental funds still include these companies?
While fossil fuels are a major contributor to greenhouse gases, these companies are also starting to develop green energy technology. And, as a result many environmental funds still include these companies.
When we approach the challenge of investing sustainably we look at the following methods:
1: Using an existing robust investment methodology
We focus first on our existing investment methodology that emphasises reliable sources of higher expected returns, while aiming to minimise unnecessary turnover and trading costs.
2: Evaluate company sustainability across all major industries
Next, we evaluate those companies being considered using a focused set of environmental issues that reflect primary concerns. By using a holistic scoring system, rather than a completely binary ‘in’ or ‘out’ screening process, we preserve diversification while recognising those companies with positive environmental profiles.
Companies may also be rated on sustainability considerations within each industry. This added level of scrutiny is recognition that, in the real economy, capital markets and the supply chain are highly interconnected. For example, a retail company may consume electricity from a utility company and transportation services from a haulage company.
3: Emphasise investing in companies acting in more environmentally sound ways than their industry counterparts
Comparing companies within sectors recognises this interconnectedness and can be used to invest more into the most sustainable companies within a given industry.
This could include retail companies that improve the energy efficiency of their facilities; utilities that produce electricity using solar or wind power; haulage companies that improve the fuel efficiency of their fleets or use alternative-fuel vehicles; or energy companies that increase efficiency, reduce waste and improve their overall environmental footprint.
4: Exclude or reduce exposure to companies with poor environmental practice or other social considerations
On the other hand, companies with poor environmental sustainability ratings relative to industry peers may receive less investment or be excluded. For example, if you are trying to reduce your portfolio’s greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may first be de-emphasised or excluded from the portfolio altogether. This across-industry comparison provides an efficient way to significantly reduce the aggregate greenhouse gas emissions per unit of revenue produced by companies within a portfolio, with a minimal reduction in diversification.
Using such a combination of company selection and scoring may allow for substantial reduction in exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves – important goals for many investors – while providing a robust investment strategy that is broadly diversified and focused on the drivers of expected returns.
It is possible to sustainably invest and to do so right now. A robust investment framework, overlaid with sustainability considerations, enables investors to sustain goals without compromising on sound investment principles or accepting lower expected returns.
If you would like to know more about investing sustainably, please do contact us.