Sustainable investing (SI), which has gained popularity over the past decade, probably won’t evaporate as it has during past bear markets and economic slumps.
SI practitioners consider environmental, social and governance (ESG) factors, such as human rights, pollution and corporate governance, when picking companies for sustainable, long-term success. Four things are different about SI investing this time around:
- A growing body of research indicates companies adopting ESG frameworks for their strategic and capital-allocation plans can lower capital costs while increasing long-term returns, helping companies be more “sustainable” in the long run.
- Increasing numbers of institutional investors and firms around the world generally support the concept of sustainability and the United Nations-supported Principles of Responsible Investment (PRI), which promotes ESG consideration. Hundreds of firms and institutions representing more than $70 trillion in investments have signed the PRI.
- The PRI allows a great degree of flexibility for investors and isn’t punitive or exclusive of industries necessary for the functioning and advancement of the global economy. Think fossil fuels.
- The structure of ESG under the PRI allows for the use of multiple factors, which enhances the broad application of ESG.
SI today is somewhat more practical than socially responsible investing of past decades, which typically focused on trying to change social norms and often led to the exclusion of whole industries based on societal preferences at the time. The structure of SI investing generally shifts in relation to the long-term sustainability of businesses.
For example, SI investors might include fossil-fuel companies that have adopted an ESG framework in their long-term strategic and capital-allocation plans. European oil conglomerates Total SA and BP are examples of companies that have built ESG into their long-term planning and rank highly on a sustainability basis.