How to invest in things you believe in
COVID-19 may have caused a shortterm return to single-use plastic but, according to Schroders’ sustainability experts, this is only a short-term blip, and the world urgently needs to ramp up disclosure, ambition and action.
As part of my effort to live more sustainably, I’ve been looking into sustainable investing strategies.
There are many, and it’s not always easy immediately to distinguish the differences between them.
Luckily for you, I’ve done the research, and it turns out that “sustainable investing” is an broad umbrella term that covers a variety of approaches. You just need to figure out which approach best suits your financial and sustainability goals. Now, I can’t tell you which one to choose, but I can run you through some of the main strategies.
◆ ESG (environmental, social and governance) integration is a general approach to investing that incorporates ESG considerations alongside traditional financial analysis.
Broadly speaking, environmental factors include climate change,
EBETH VAN HEERDEN
deforestation, biodiversity and waste management. Social factors include labour standards, nutrition and health and safety. Governance includes company strategy, remuneration policies and board independence or diversity.
ESG integration is about understanding the most significant ESG factors to which an investment is exposed, and making sure that you’re compensated for any associated risk.
◆ Sustainable investing. Although sustainable investing involves ESG integration, it takes things further by focusing on the most sustainable companies that lead their sector when it comes to ESG practices.
Both the ESG integration and sustainable investing approaches are about engaging with company management to make sure the firm is run in the best possible way. This can mean challenging a company on its sustainability practices to encourage improvements where necessary.
◆ Screened investing. Screening is when you decide to invest, or not to invest, based on specific criteria.
Let’s say you want to invest only in companies that promote workplace diversity. Your criteria might be substantial representation of women and minorities in management-level positions, and/ or the existence of diversity and inclusion policies.
You (or your fund manager) will use these factors deliberately to exclude investments that don’t meet these criteria (negative screening), or you might purposefully include those that do (positive screening).
◆ Ethical investing is an example of where screening is commonly used. Investors screen out investments that they deem unethical because they don’t fit in with their ethics or values (it’s also called values-based investing).
People commonly exclude so-called “sin stocks”, such as alcohol, gambling, weapon manufacturing, tobacco or adult entertainment companies, because they view these activities as immoral.
Impact investing is about putting your money to work in a way that has a specific, measurable and positive benefit to society or the environment. This isn’t to be confused with a charitable donation though. You also want to generate a return on your investment, as well as promote social good.
Let’s say you’re passionate about education in rural communities.
You can put your money into a fund that invests in companies or projects that are working towards delivering quality education in rural communities around the world. Or you can invest directly in these companies or projects yourself.
Impact investing is more common in private markets (that is, not the stock market). Recipients tend to be small companies with clear social goals that otherwise may not have access to capital.
◆ Thematic investing.
Yup, you guessed it. This is about investing according to your chosen investment theme. Perhaps your theme is “health and wellness”. In this case you’ll want to consider only funds that invest in healthy food brands or companies focused on developing new vaccines.
Or perhaps your theme is “green investing”. If so, you’ll invest only in companies and technologies that are considered good for the environment (alternative energy generators or energy-saving technology manufacturers, for example).
The above is hardly an exhaustive list of all the available sustainable strategies. But it should serve as a good starting point to help you understand the differences between some of the common approaches.
Ebeth van Heerden is advisory business development manager at Schroders.