Why sustainable investing is important

Why is sustainable investing important? Sustainable investing is important because it can both reduce investment risk and support companies to play an active role on important issues such as climate change and social justice. Sustainable investors look for opportunities and financial returns in companies with high environmental, social and governance priorities.

Kilde: Getty Images.

'Sustainable' can also mean self-sufficiency or long-term stability. Companies that mitigate risks through good governance or whose business practices limit climate vulnerabilities will fall under the umbrella of sustainable investments.

Investors have the power to leverage their funds to change business priorities and raise awareness of environmental, corporate social responsibility and governance issues. Sustainable investing, also called impact investing or ESG investing, can be a strategy to create a positive social and environmental impact while building long-term wealth.

Although 83% of millennial investors believe the myth that sustainable investing involves a performance trade-off, interest in sustainable investing continues to grow. According to Morgan StanleyReport of the Institute for Sustainable Investments 202179% of all investors and 99% of millennial investors – the latter an all-time high – reported interest in sustainable investing.

With the flowbearmarktThere is another important reason why sustainable investments are being prioritized in asset management: sustainable funds have shown greater resilience in economic recessions. Investors can use sustainable and responsible entrepreneurship as an additional screening tool when building investment portfolios.

What is sustainable investing?

Sustainable investing is investing in companies that prioritize environmental management, social responsibility and good governance. Used interchangeably withESG investmentsA sustainable investing approach looks at a company's ESG rating for its overall sustainability impact and balances ESG risks and potential returns.

Other sustainable investors take a discretionary approach to filter out companies that do not meet certain ESG criteria. Investors usually filter to avoid companies that produce fossil fuels, weapons, nuclear power, tobacco, adult entertainment or other controversial products.

Impact investment, also used interchangeably with sustainable investing, often focuses on a single cause or goal, such as climate, rather than broad ESG criteria. ESG impact investors can prioritize companies that take targeted action to reduce carbon impact or combat social injustice.

Why invest sustainably?

Sustainability is more than idealistic: it offers an investment process that can deliver stable long-term returns while having an environmental and social impact. If you're ready to expand, here are four reasons why every investor should consider investing at least part of their portfolio in companies with sustainable priorities:

Increased efficiency

For more than twenty years, companies with high ESG values have demonstrated consistent resilience and growth. Even during the financial stress of the COVID-19 pandemic, ESG stocks outperformed the market. A few highlights:

According to Morgan Stanley's 2021 Institute of Sustainable Investing report, the relative performance of sustainable and traditional U.S. equity funds showed no economic trade-off between performance between 2004 and 2020.Sustainable funds performed bettertraditional funds.
Similarly, the S&P 500 ESG index has outperformed the broader indexin the reporting periods of the past ten years.
By 2021, Morningstar's broad, 373-stock U.S. Sustainability Index will return 3% better than the overall stock market's 29.1% return.
Also in 2021, the 50 US companies with the best ESG scores, as assessed by Sustainlytics, beat the broader US market by more than 8%, for a return of 33.3% for the year.

Reduced volatility

ESG foundedhas shown historic resilience during market downturns, such as the stock market collapse in 2008 and late 2018, and the market contraction of 2020. Companies with strong ESG priorities have also demonstrated a greater ability to bounce back.

Sustainable investors view ESG investments as a buffer against the current market downturn and possible recession. Predictors such as good governance, clear supply chains and lower environmental impact or vulnerability protect companies from ESG-related risks that can increase long-term volatility.

Long-term trends

According to Morgan Stanley's 2021 report, 99% of millennials showed interest in ESG investing. That generation will inherit an estimated $27.4 trillion, mostly from baby boomers. With the transfer of wealth between generations and shifting sustainability priorities, investors can expect to see more companies prioritizing ESG and stricter and more reliable sustainability metrics.

Companies with sustainable priorities have shown sustainable growth 25 years ago. With changing demographics and interest from both consumers and investors, it is reasonable to believe in buy and holdESG Exchange Traded Funds (ETF's), mutual funds, stocks and bonds could see even greater growth over the next 25 years.

To have influence

The bottom line is the epitome of sustainable investing. When done right, investors earn excellent returns while creating positive change in important areas like climate change and social justice. Investors can help change the world, and this is an important time to create social change through investment dollars.

According to Morgan Stanley's 2021 report, 93% of individual investors who believe the economy is strong have expressed interest in climate-themed investments. According to the same report, 60% of all investors are interested in a solution to climate change.

While the recent turbulence may have more investors concerned about the strength of the economy, interest in ESG and the urgent need to curb climate change are still driving investors to make a difference. The war in Ukraine has highlighted the desire to discover where private capital can have an impact in the world.

Screening of sustainable investments

ESG reportingprovides insight into a company's ESG or sustainable priorities. However, without a standard ESG reporting framework, these reports can be biased as they are often produced by the companies themselves.

ESG ratingsmeasuring a company's overall long-term environmental, social and governance risks. The very used oneMSCI USA-ratingsysteemmeasures sector-specific issues, which are then weighted based on potential impact. The industry-specific and weighted scores are combined to give each company a score between 0 and 10, which is then converted to a letter grade between CCC and AAA. Does it sound complicated? It's actually very simple: the most sustainable companies have a score of AA or AAA. A score of BB is average. Investors can view the details of the MCSI report to see the risk profile of an individual company.

The future of sustainable investing

Sustainable investing is important because it can be a tipping point for driving change on complex issues such as carbon emissions and living wages. Although the solutions are not simple, investor interest in sustainability has the power to turn the tide.

Sustainable investing may play a greater role in the future. Expect new companies to enter the sustainability space as investor demand drives fundamental changes. We could also see a standardized framework for ESG reporting and more detailed ESG assessments that improve the assessment of a company's priorities.

The fundamentals of traditional investing and sustainable investing are the same. Sustainable investing adds the element of global impact, which could become the new paradigm of investment standards. With sustainability screening tools it is possible to have a positive impact while achieving stable long-term returns.

The Motley Fool is eendisclosure policy.

Why sustainable investing is important | The motley fool (2024)