Sustainable investing is gaining more and more traction each year but financial literacy on the topic remains low even within the financial profession. With short courses available at the click of a button, “ESG experts” are flooding Linkedin with their services, meanwhile the U.S can’t decide if it is pro or anti-ESG - it is confusing, it is draining, but it’s important. If sustainable investing is expected to become the norm then it’s important to get to grips with the basics to weed out the misinformation in the media and figure out what’s best for you.
Investing is often gate kept by the elite and educated by using terminology that is inaccessible to the everyday person. Whilst expert knowledge is needed to work on a trading floor or be a wealth manager or financial advisor, to hold an investment account and learn the principles of investing is well within every student’s remit. First, some essential definitions.
Investing is putting money into projects, people, businesses with the expectation that this will make you money back in the future. The money you invest is often called “capital”, the things you invest in may be called “assets”, the increased value of those things over time is called “growth”, and the money made on these investments is often referred to as “returns”.
Types of investing can exist on a spectrum of finance - impact. On one end, there is a full finance focus and on the other end there is full impact focus. Many people think that there is a trade-off between doing good and making money but there are many strategies that sit in the middle of this spectrum doing both. There are many sustainable investing strategies where you can invest inline with your values and grow your wealth.
What is traditional investing?
The primary purpose of traditional investing is to make the most money possible within the level of risk you’re prepared to take. It weights up risk and return without necessarily regarding impact or sustainability. Until recently, this is how most companies and financial professionals made financial decisions.
What is philanthropic investing?
If traditional investing is all the way to finance, the other end of the scale is charity and philanthropy. This donations to charity, sponsorship and other forms of philanthropy where money is invested without expectation of anything back. The focus is on the impact the money can make rather than growing wealth.
What is sustainable investing?
Sustainable investing covers a range of approaches that focus on finance AND impact. Some sway more to the finance and others to the impact, but the emphasis on both remains. It can also be referred to as responsible, ethical, or moral investing. Under sustainable investing there are 3 distinct categories:
Socially responsible investing
ESG investing
Impact investing
What is socially responsible investing?
Socially responsible investing (SRI) is about minimising harm through avoiding harmful industries that don’t align with your values. It is often called negative screening where you take a standard investment profile and then screen out the things you disagree with e.g. divesting from fossil fuels to combat climate change, or divesting from firearms to take a stand against gun violence. This method reduces negative impact but does not promote positive solutions. There are various tools to employ this approach such as As You Sow, the largest shareholder advocacy non-profit in the US. Their databases allow you to search your investment portfolio for involvement in a variety of industries like fossil fuels, military weapons, and private prisons.
What is ESG investing?
This strategy has arguably had the hardest time being understood, especially in the last few years. The politicisation of ESG investing in the US has created a storm of opinions and misinformation online. ESG (environmental, social, governance) investing is a financial risk framework. It assesses the financial risks posed to a company in the 3 categories of E, S, and G. It’s a strategy that promotes companies that are managing these financial risks well, it is not a reflection on the company’s external impact in these 3 areas. ESG ratings are an average score across the 3 categories - based on these ratings investors may make investment decisions to balance finance and impact in a way that suits them. Learning about the complexities and limitations of ESG ratings is fundamental to employing this strategy.
What is impact investing?
The Global Impact Investing Network (GIIN) defines impact investing as “investments made to generate positive, measurable social and environmental impact alongside financial return”. That is, intentional and purposeful impact whilst also making money. It is a very specific and measurable investment strategy that is emphasised by the UN and GIIN as essential to achieving the SDG 2030 Agenda. Impact investing is considered the sweet spot on the finance-impact scale of investing and is on the rise for every day investors and institutional investors. There are a range of services providing impact investing and impact tracking popping up across the world and the impact investing market has topped the USD 1 trillion mark. This approach generates purposefully positive impact as well as mitigating negative impact.
Understanding what sustainable investing is and isn’t is the first step to generate change in this area. There are many options that don’t involve sacrificing wealth or values, it is an individual choice where to sit on the finance-impact scale. Sustainable investing is not complicated when plain language is used and we stay away from politics. Let’s change the world one dollar at a time.
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Disclaimer: Content is for informational and educational purposes only. This is not financial or investment advice.