The world has witnessed many changes throughout the investment community in recent times. From emerging markets and cryptocurrencies to the role of online trading platforms, there are more opportunities than ever before. However, one of the most notable paradigm shifts can be seen in the form of sustainable investing.
What does sustainable investing involve? What are some of its primary advantages from the perspective of the average trader? Do environmental funds and similar assets represent the wave of the future? All of these questions warrant a closer look.
A fundamental description of sustainable investing
What is sustainable investing? In a nutshell, this approach is associated with developing a more conscientious approach when examining potential opportunities. Thus, it is sometimes referred to as “ESG” (environmental, social and governance) investing.
The core intention of sustainable investing is to take numerous other factors into account other than a simple return on investment (ROI). As the Harvard Business School notes, a sustainable strategy will focus upon ancillary concerns, including:
- The environmental impact of a specific venture
- The track record of a company
- Long-term profit margins
As consumers become more aware of their impact on the environment, it only stands to reason that sustainable investments will become further entrenched within portfolio and wealth management. There are still several other reasons why a sustainable mindset can offer impressive rewards from a longitudinal approach, and these will be discussed immediately below.
Sustainable investing will help to address societal concerns
Although this first observation may sound slightly altruistic, it is nonetheless true. Sustainable investors care about the world around them. They also appreciate the fact that their decisions could very well affect future generations. For instance, some organisations are now devoting a portion of their profits toward building the infrastructure of developing nations. Others may sponsor the education of a child for every confirmed share purchase.
The main takeaway point here is that investing in sustainable companies involves a sense of moral responsibility. Traders can therefore rest assured in the fact that they are positively impacting society as a whole.
Increased levels of transparency
Contemporary investors (particularly millennials) are much more cognisant of how their funds are being used. Will this capital be leveraged to make a positive difference, or might it simply be funnelled back into the coffers of a company? Sustainable investment management will address these logical concerns.
Companies that offer this sense of transparency can likewise appeal to a much wider demographic, resulting in a more profitable pipeline and a positive brand reputation. These are some of the very same reasons why large organisations have already adopted this approach.
Sustainable investing is associated with fewer compliance issues
This next benefit is somewhat associated with the notion of transparency that was mentioned in the previous section. Companies that are forthright with their mission statements and balance sheets are much less likely to come under scrutiny by governing bodies. One pertinent example can be seen in the need to remain compliant with current GDPR guidelines.
Furthermore, sustainable investors will rarely become involved with a venture that presents a worrying level of risk from a corporate governance standpoint. This helps to reduce exposure to a volatile marketplace, and once again, it aids in constructing a balanced portfolio.
Sustainable impact investing offers numerous eco-friendly opportunities
Environmental investing now represents one of the mainstays of any successful approach to wealth management. One common method involves carbon credits, as these will help to reduce the impact of a company upon the environment. Such schemes can also result in healthy profit margins, which are obviously important from a purely ROI perspective.
Having said this, another interesting point to make involves the relative tangibility of eco-friendly investments. Traditional asset classes (such as Forex pairs, commodities and indices) are somewhat ethereal in nature. In other words, their impacts will not normally be felt within the physical world. The same cannot be said when referring to sustainable alternatives.
Sustainable impact investing can have a direct effect on the environment. Here are some real-world examples to consider:
- Efforts to combat climate change
- Policies to prevent deforestation
- Projects associated with providing clean drinking water
- Companies formed to tackle ocean pollution
Investors will therefore be able to see the results of their strategies from a long-term perspective.
What sustainable investment strategies exist?
The good news is that there is a kaleidoscope of options to appreciate. The exact types of ESG investing can be broken down into several categories. HSBC wealth management highlights a handful of popular approaches:
- Investing in companies with ethical goals.
- Becoming involved with firms meeting specific ESG guidelines.
- Focusing on the environmental impact of a venture.
- Impact investing (an affiliation with firms that have already demonstrated a commitment to creating a sustainable difference in the world).
It should likewise be mentioned that a number of ecological investment funds have entered the marketplace over the past decade. Although these assets are obviously intended to provide a positive yield, they are equally focused on sustainability and embracing environmentally friendly policies. Auch funds are sometimes referred to as Socially Responsible Investment Funds (SRIFs).
How profitable is sustainable investing?
One of the core tenets of ESG-based investing involves risk mitigation through superior levels of governance and transparency. Furthermore, the majority of these strategies are more concerned with the ability to generate longitudinal profits as opposed to enacting short-term trades. This helps to blunt levels of volatility, which is a primary reason why sustainable investing funds often represent a sizeable portion of a well-balanced portfolio.
It has also been shown that companies capable of providing real value to all stakeholders are much more likely to succeed from a long-term perspective. This is likely due to the fact that they tend to attract those who are willing to remain committed for a considerable period of time (generally no less than five years). Of course, profitability will depend upon several other factors such as the associated sector, the size of the company and market conditions as a whole. This is why knowing how to invest in sustainability successfully will require a significant amount of research.
Sustainable investing: responsible decisions for a brighter future
There is no doubt that socially responsible investing will have a massive impact on the marketplace. However, this benefit is ultimately overshadowed by the positive effects on the world around us. Whether referred to as green investing, ESG ventures or ethical wealth management, the advantages should now be clear.
It will therefore be interesting to see what new opportunities come to light in the future. Investing in sustainable companies represents a morally sound perspective, and above all, the potential for long-term profits is very real. Simply stated, sustainable investing will provide traders with the best of both worlds.