Companies that don’t mention sustainability or environmentally-conscious practices these days, are seen as slow moving relics of days gone by. They’re slow to change and adapt to the common consensus that we should be trying to save the planet, not destroy and exploit it. The younger generations – Generation Z and Millennials, are most in tune with this perspective and are the most active when it comes to climate change. These groups also hold more ESG (Environmental, Social and Governance) stocks than older generations and with Millennials now representing the largest adult cohort globally, sustainable investing could be poised to move from a niche market to the only market.
Is There A Sustainable Stock Market?
While there’s no sustainable stock market per se, there are a few ways you can invest through a more sustainable lens. Investing in companies and exchange-traded funds that focus on environmental, social and financially responsible practices has become popular in recent years as a way to essentially put your money where your (sustainability) mouth is.
How Do You Invest In Sustainability?
Unfortunately, there’s no clear cut way to invest in sustainability. Sustainable is a broad term with various definitions. Whether or not a company is sustainable depends on multiple factors, including your own personal perspective.
You also need to have a keen eye for “greenwashing”, where a company or fund can appear to be more sustainable than it actually is.
As a starting point, you can invest in individual company stocks that you know have a sustainable focus, green exchange-traded funds (EFTs) or green mutual funds.
ESG Market Size
ESG investing is growing in popularity, quickly. Assets with ESG mandates are expected to reach half of all professionally managed assets by 2024. Once considered a niche, ESG is now going mainstream. Europe dominates ESG asset adoption with many European investors saying that ESG is central to their investment approach. In the EU, funds without an ESG objective are even categorized as “non-ESG”. By 2025, global ESG assets will reach $96 trillion.
What’s Considered Sustainable Investing?
From an environmental perspective, some look to invest in companies that aim to eliminate their adverse impacts to the environment. This can range from prioritizing renewable energy to reducing waste in their products and operations.
From a social perspective, some companies focus on promoting a positive social impact. This can include prioritizing diversity, equity and inclusion and contributing to local and global communities.
From a governance perspective, some companies focus on prioritizing good governance practices. This can include ethical leadership, transparency and accountability.
Some funds, indices and even stock exchanges now focus on sustainable investing, or ESG (Environmental, Social and Governance) investing. But knowing what’s sustainable is more complicated than you’d think. Because investors have different definitions of sustainability, multiple differing factors are applied when determining if a stock is sustainable, or green, and no one consistent way is applied across all.
Risks of Investing In Sustainability
As with any investment, investing with a focus on ESG has risks. Transparency is one of the most challenging areas in sustainable investing. In recent years, some ESG funds have made decisions against ESG issues, calling into question their authenticity. Some funds that claim to prioritize diversity in the boardroom have voted against proposals requesting disclosure of board diversity. While some funds that claim to promote social issues voted against disclosing sexual harassment policies and gender pay gaps. Unfortunately, while we expect our investments in ESG index funds to be managed in alignment with our values, evidence has shown that’s not always the case.
This article is for general informational purposes only and should not be taken as financial, legal, tax, investment or other advice. Consulting with a professional financial advisor is recommended for your own individual investment planning. Sustayn is designed to present the most useful recommendations for environmentally friendly approaches and items. We update links when possible, but note that links can be broken and subject to change.
