Sustainable investing is a discipline of investing that considers corporate governance, environmental, social, and economic factors in order to produce long-term challenging financial returns and beneficial social impact.

Sustainable investing is driven by a variety of factors, such as one’s own values and aspirations, institutional missions, and the needs of clients, constituents, or plan participants. In addition to pursuing high financial returns, sustainable investors think that their money should be put to work advancing social, environmental, and governance standards. They might actively look for investments that will likely have a significant positive impact on society or the environment.

Sustainable investors have typically concentrated on ESG incorporation, which involves considering environmental, societal, community, and corporate governance (ESG) factors when analyzing investments and building portfolios across a variety of asset classes.

5 variables that lead to a sustainable investment cycle are:

 

1. Positive/best-in-class screening

Typical ESG investing strategies use these scores as screening criteria and major benchmarks, a process known as best-in-class. The companies from each sector that receive the highest ESG scores are chosen using this strategy. Portfolio managers impose thresholds, admitting into the portfolio only businesses that rank within a certain sector, or they reweight portfolio positions against an index in accordance with these rankings. Because it adapts so well to passive investment approaches and enables a low tracking error, the best-in-class methodology has evolved into a widely accepted sustainable investment strategy.

2. Negative/exclusionary screening 

For centuries, people have rejected businesses based on ethics. In contemporary investment management, portfolio managers omit businesses engaged in conduct deemed unethical or in conflict with conventions or agreements internationally. This is often referred to as ‘Socially Responsible Investing’. The products and practices that are excluded vary greatly between investment management institutions, but some of the most frequently excluded ones include alcohol, tobacco, pornography, weapons, nuclear power, gross human rights violations, and businesses that operate in or with sanctioned nations.

3. ESG integration

ESG investing relies heavily on ESG scores, which are indicators that are expressed as a number or other variable. These ratings are frequently determined by specialized third parties based on the environmental, social, and governance policies and procedures of the companies and how much of this information is made publicly available. A company can achieve a higher ESG score by publicly disclosing more information about its governance, social, and environmental practices. The systematic and explicit integration of significant ESG factors into investment analysis and decision-making is known as ESG integration. Along with thematic investing and screening, it is one of three methods for incorporating responsible investment into investment decisions.

4. Impact investing –

Positive social and environmental outcomes are specifically targeted by impact investing strategies, which also aim to generate market-rate financial returns. It requires a very focused approach and calls for investment teams to have a clear idea of the types of social changes they hope to bring about through their investment activity. Each investment must go through a diligence process to determine whether the chosen project or business can produce the intended impact results. A formal process to measure and monitor investments’ impact to determine whether they are on track to accomplish their environmental and social goals is another essential component of impact investing.

5. Sustainability-themed investing

By making investments in businesses that provide answers to these problems, investments with a sustainability theme help address social or environmental issues. Population growth, rising wealth in developing nations, resource scarcity, energy security, and climate change are typically the most crucial issues. This style of investing focuses on themes related to the environment, but it can also address social issues like health.

Sustainable investing has tended to favor businesses that have a positive impact on the environment by reducing emissions or investing in clean, sustainable energy sources as awareness of global warming and climate change have increased in recent years. If an investor wants to try their hand at Socially Responsible Investing, community investing is one of the best approaches. It entails putting money into projects that boost local communities economically.

(This Article is written by Achin Goel, Vice President, Bonanza Portfolio Limited. It was published in the Times of India on December 17, 2022. Check out the link – https://timesofindia.indiatimes.com/blogs/voices/5-variables-that-lead-to-a-sustainable-investment-cycle/)