How to Invest in Sustainability

Sustainable Investments

Investing in projects and products that are sustainable, as well sustainable from a global production perspective, has never been at the top of the investor's mind like it is today. A whole new investor has emerged, one that is focused on putting their money to work in ways they deem socially responsible. One such way is investing in "sustainability." You may be asking what sustainable investing is, that's precisely what we are here to find out.

What is Sustainable Investing?

Investors use a wide variety of different funds and investment strategies to support or create positive social impact: sustainable investing funds, climate investment funds, environmental, social, and governance investing (ESG), socially responsible investing (SRI), as well as impact investing.

“Sustainability” is a broad term that encompasses economic growth, environmental protection, and social progress. In sustainable investing, investors choose to direct their money toward companies working to mitigate issues such as climate change and social inequity, in effect promoting corporate responsibility.

Along with traditional financial measures, ESG investing focuses on environmental issues (such as pollution and climate change), social issues (including product safety, human rights, and diversity and inclusion), and governance issues (such as accounting standards compliance, anti-competitive behavior, and a strong ESG management process).

To mitigate risk, investors use ESG data and metrics to gain insights into the success and value of a company’s performance and policies. Essentially, the focus of ESG investing is on increasing the bottom line through investments in responsible companies that are being well-managed.

SRI investors lead with their values. If an investor doesn’t wish to support companies whose products contribute to global warming, for example, they would seek out funds that include companies engaging in alternative energy or clean tech. SRI investors look for and support ethical corporate practices that promote ethical standards such as stewardship of the environment, consumer protection, diversity, and human rights.

Meanwhile, a little like philanthropy, investors use impact investing as a strategy to support businesses’ commitment to positively serve society. A tangible social benefit—clean air, healthcare, literacy—is important to these investors, and just as important as the bottom line.

Whether investors call themselves socially responsible or impact investors, their clout has made this type of investing into Wall Street’s hottest growth area.

The U.S. Forum for Sustainable and Responsible Investment reported that in 2020, one-third of all assets under management in the U.S. was from SRI and impact investing, more than $17 trillion dollars, a full 42 percent increase from 2018. One dollar of every $3 under professional management is in some form of socially responsible investing—including social justice, climate change awareness, and public health—which is reflective of the shift in priorities for many investors after recent global seismic changes from social protests to the pandemic (1).

The staggering scale of the disruption (and opportunities) that will play out over the next few decades is why many company executives are strategizing as to how to position their companies for the future in the face of ongoing mega-trends, such as climate change.

Investing to combat climate change has gotten so big, there are now entire green investment groups and funds created specifically to address climate. One such group is the Adaptation Fund, which finances projects and programs to help vulnerable communities in developing countries adapt to climate change (2).

Invest with Intelligence

A growing number of governments, as well as corporations, are pledging to back a United Nations campaign aiming for net-zero greenhouse gas emissions. This will affect how nearly every company operates and drive a transformation of the global economy. According to the World Bank, around $90 trillion will be needed by 2030 to invest in infrastructure. Yet this investment promises to create new opportunities and jobs, a $4 yield in benefits for every $1 in investment (3).

For investors, tomorrow’s best companies will be those that can operate outside of their comfort zone. Why? At its core, sustainability has a lot to do with resiliency. Companies must build the capacity to adapt and innovate amid worldwide disruptions. In effect, sustainability requires “unlearning” how industrial society has operated for 150 years, and charting a new route to reach the same goal of delivering shareholder value.

Why Invest in Sustainability?

Sustainable investing makes a lot of sense, even if an investor’s only concern is the return on the money they are investing. Investors don’t need to compromise their principles over profits, because there is solid evidence that sustainability measures drive better financial returns.

Like the tortoise in the fabled race with the hare, long-term investors are seeing growing evidence that this type of investing can beat traditional methods. For example, in the past few years, companies with higher ESG ratings had higher average return on invested capital, compared to companies with lower ratings, according to MSCI (4).

The reason for this outperformance is straightforward: ESG pushes companies to look beyond the next quarter or even the next three- to five-year business cycle in evaluating risk. Companies with strong ESG ratings have improved their risk management, diversity, and innovation–building resiliency, especially during social and economic crises (5).

Even the results from one of the toughest years in recent history, 2020, were good. In the first half of that year, Morningstar reported that 72 percent of sustainable equity funds ranked near the top of their categories, while all ESG index funds outperformed their conventional counterparts” (6).

Investors interested in sustainable investing are in good company. The pandemic softened some areas of growth but sustainable priorities remained strong. According to research conducted by Morgan Stanley in 2021, 79 percent of individual investors and 99 percent of millennial investors are interested in sustainable investing (7).

Going forward, C-suite executives and boards are treating social responsibility and environmental stewardship as integral to corporate and business strategy. As a result, investors wanting to make a positive impact are seeing ample opportunities to achieve positive returns, as well.

How to Invest in Sustainability

With the large number of companies touting their sustainability credentials, you would need a “scorecard” to keep track. A much easier route would be to purchase ETFs or mutual funds that invest in companies with specific sustainability goals. A simple search on Magnifi indicates numerous ways for investors to access sustainable funds with low fees:

References:

2020 Report on US Sustainable and Impact Investing Trends, 2020, The US Sif Foundation, https://www.ussif.org/files/Trends/2020_Trends_Highlights_OnePager.pdf
"About," Adaption Fund, https://www.adaptation-fund.org/about/
“Financing Climate Action,” accessed December 6, 2022, United Nations, https://www.un.org/en/climatechange/raising-ambition/climate-finance
Lodh, Ashish, “ESG and the cost of capital,” February 25, 2020, MSCI, https://www.msci.com/www/blog-posts/esg-and-the-cost-of-capital/01726513589
Whelan, Tensie and Ulrich Atz, Tracy Van Holt, and Casey Clark, ESG and Financial Performance, 2021, Rockefeller Asset Management and NYU Stern Center for Sustainable Business, https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf
Hale, John, “Sustainable Stock Funds Held Their Own in Second-Quarter Rally,” July 8, 2020, Morningstar.com, https://www.morningstar.com/articles/991091/sustainable-stock-funds-held-their-own-in-second-quarter-rally
Sustainable Signals: Individual Investors and the COVID-19 Pandemic, accessed December 6, 2022, Morgan Stanley Institute for Sustainable Investing, https://www.morganstanley.com/assets/pdfs/2021-Sustainable_Signals_Individual_Investor.pdf