What is sustainable investing?
Sustainable investing is an umbrella term used to describe a broad range of investment approaches that seek competitive financial returns and methodically considers environmental, social, and governance (ESG) risks and opportunities in the investment process.
The benefits of sustainable investing
The benefit of sustainable investing is that it’s an investment approach that offers investors an opportunity to invest in innovative companies that are seeking better ways of doing business and are intentionally trying to manage their environmental and social risks.
This investment framework provides greater transparency about how and where money is invested while assigning asset managers a stewardship role to hold investee companies accountable to improve their ESG impacts.
The sustainable investing umbrella
Terms such as socially responsible investing, ESG investing, and impact investing all fall under the sustainable investing umbrella.
But it’s ESG investing that is driving the mainstreaming of sustainable investing.
ESG investing is an approach to managing assets where investors explicitly acknowledge the relevance of ESG factors in the investment decision-making process.
ESG investing aims to correctly price ESG risks and opportunities.
The case for sustainable investing
While the first sustainable investing mutual fund was launched in 1971, the ensuring 50 years has seen remarkable growth and evolution.
Growth
Globally, investors have allocated $35.3 trillion in assets to sustainable investing strategies, with recent growth of 15% over the last two years.1
Rationale for the growth and evolution
- Demand: Clients and pension fund beneficiaries are increasingly calling for greater transparency about how and where their money is invested. More than 8 in 10 U.S. individual investors (85%) express interest in sustainable investing, while half take part in at least one sustainable investing activity.2
- Manage risk and potentially enhance returns: It has become increasingly clearer that one of the main reasons for increasingly integrating ESG into the investment process is recognizing that ESG investing has the potential to reduce risk and produce desirable returns, as it considers additional risks and injects new and forward-looking insights into the investment process.3
- Increased transparency: An increase in ESG disclosures has enabled new investment approaches to emerge. While fewer than 20 companies disclosed ESG data in the early 1990s, the number of companies issuing sustainability or integrated reports had increased to nearly 9,000 by 2016. This increased transparency has allowed asset managers to identify best-in-class companies based on ESG risks and opportunities.4
Additional Resources
1 Global Sustainable investing Review: 2020. 2021. http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf
2 Morgan Stanley. Sustainable Signals 2019. https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf
3 Friedberg, Rogers, and Serafiem. How ESG Issues Become Financially Material to Corporations and Their Investors. 2020. 2020. https://www.hbs.edu/faculty/Pages/item.aspx?num=57161
4 Amel-Zadeh. Why and How Investors Use ESG Information. 2017. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2925310
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
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