Not that long ago, most investors didn’t look too hard at the social and environmental practices of the companies where they put their money. That’s changing rapidly, however. These days, sustainable investing, which integrates environmental, social and corporate governance metrics, is one of the fastest-growing investment approaches.
But what exactly is sustainable investing? The term itself is often confusing, because it encompasses various philosophies. For example, it’s often confused with socially responsible investing, dubbed SRI.
An SRI strategy typically excludes companies that earn revenue through manufacturing or selling certain products or services that some people consider objectionable. For example, many SRI investors screen out companies in the business of making military weapons, tobacco, alcohol or gambling equipment and facilities. Many of the SRI strategies have their roots in religious traditions—both conservative and progressive.
John Wesley, a leader in the 18th century Methodist movement, was opposed to the slave trade, smuggling and other activities that were unsavory, illegal or which violated human rights. Over time, the Methodist church opposed investments in companies that manufactured tobacco products or alcohol. Today, some mutual funds and exchange-traded funds are geared toward religious groups that eschew so-called “sin stocks.”
These strategies are difficult to bring to the mainstream because each person has a different idea of what a “sin stock” may be. One person may object to companies doing business in Darfur; another person may be adamantly opposed to contraceptives.
Sustainable investing, on the other hand, often focuses on more measurable factors, such as greenhouse gas emissions, factory farming, the use of child labor, and manufacture of cluster munitions. These metrics set sustainable investing approaches apart from many SRI strategies, which rely on various opinions in lieu of rigorous screening methodologies.
Sustainable investing strategies may also include companies making measurable progress toward solving challenges such as social inequality, unfair business practices, and climate change. In the past, investors had to settle for inferior returns when pursuing sustainable strategies; today, that is less of a concern.
According to the Forum for Sustainable and Responsible Investment, “The evidence is clear that sustainable and responsible investors do not have to pay more to align their investments with their values, or to avoid companies with poor environmental, social or governance practices.”
One reason that sustainable strategies perform as well as more traditional strategies: More and more developed and emerging-market companies are held to higher standards by institutional investors. Banks, mutual funds, pension funds and insurance companies, which account for at least three-quarters of all stock trading, are increasingly pressuring corporate boards to decrease or end practices that threaten the environment or result in human-rights violations.
This process, known as shareholder activism, threatens corporate boards with the withdrawal of investment dollars if companies don’t clean up their acts.
That’s good news for individual investors who require a certain return to achieve their goals. Today’s sophisticated methods of screening out companies with objectionable practices mean that a retiree can still generate the income to finance his or her life, without compromising deeply held values and beliefs.
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