SUSTAINABLE investing is an investment approach. This approach takes into account environmental, social and governance factors in addition to traditional financial criteria in portfolio selection and management. Today the question has evolved from “Why should I?” to “How do I?”.
Globally, out of US$80 trillion assets under management in the capital markets, over US$30 trillion are sustainable assets. The amount of assets managed with sustainable considerations have increased rapidly by more than 200 per cent since 2010, and by 35 per cent in two years from 2016.
Three in four US asset managers say that their firms now offer sustainable investing strategies, up from 65 per cent in 2016. And 93 per cent of the world’s 250 largest companies by revenue based on the Fortune 500 ranking of 2016 report provide corporate responsibility reporting. So, how do I start?
THREE STEPS TO SUSTAINABLE INVESTING
The first step in sustainable investing is to define your values and objectives.
You can start by asking some questions. What are the areas in life that inspire you? What do you aspire for the next generation when you consider the world that they would live in? What are the areas that contradict with your values?
Next, define your objectives. As an organisation, what is the firm’s core mission and purpose? For example, a university might have a mission to develop future generations of global citizens, and a family in the private hospital business might aspire to enable everyone to lead healthy lives regardless of income levels.
The next step is to take these values and translate them into actionable decisions:
- Exclude: This is typically known as a “negative screen”. You can decide to omit companies from your portfolio if they are involved in activities that contradict your values and objectives. You can exclude companies involved in controversial activities, or reduce exposure to such companies
For example, a family in the healthcare business may choose not to invest in companies that have exposure to tobacco or thermal coal.
- Promote: A more positive approach comes next. You can actively favour investments in companies that are best-in-class in areas such as labour standards, carbon emissions or governance practices versus their peers.
For example, a university endowment might specify in its investment policy that it commits to investing in companies that do not compromise the ability of future generations to meet their needs, by responsibly considering their environmental and social impacts.
Investors can choose to hold or add more of these firms to their portfolio. Institutional investors may also decide to engage directly with the management of companies that perform worst in terms of sustainability criteria and to call for improvements. If no progress is achieved by the firms in question, divestment is an option.
- Contribute: In addition to including companies that perform well in terms of sustainability, investors can choose to invest in companies that actively contribute to a better world. These firms are intentional in seeking to generate a measurable social or environmental impact alongside financial returns. This could be in areas ranging from access to finance, healthcare or education to sustainable agriculture and conservation.
Before taking the step to implement the above, it would be helpful to analyse your current portfolio, to perform a “health check” via the use of data analytics based on information from specialised sustainable data providers. Analytics help to drill down to the level of individual securities in order to understand which parts of your portfolio are already aligned with your sustainability criteria and to identify any discrepancies.
The framework for constructing a sustainable portfolio described above is just the starting point.