What Is Sustainable Investing?
Sustainable investing has broadened the measure of corporate performance beyond simply financial metrics. Sustainable investing considers material environmental, social, and governance, or ESG, criteria and their relative impacts on corporate performance. Sustainable investing has grown to be more than simply excluding certain companies or industries that do not align with an investor’s values. Investors that consider ESG criteria have begun to reward companies and industries that do align with their interests and values.
It is believed that Environmental, Social, and Governance issues may present material risks for companies and industries; these risks, in turn, may translate into risks for investors. Some examples of these issues appear below.
Environmental screening is associated with the practice of considering environmental and energy matters as a metric of corporate performance. Some of these matters may include:
- Controversies relating to air, water, or land pollution or a history of environmental fines and/or civil suits
- A pattern of violating federal or state environmental regulations
- Production of chemicals known to be particularly damaging to the environment and/or human health
- A history of unsustainable environmental practices that exploit the world’s natural resources
- Companies significantly involved in the development and commercialization of genetically modified organisms
- Carbon emissions
- Energy efficiency
- Water scarcity
- Waste management
- Pollution mitigation
Social screening is associated with the practice of considering relationships with stakeholders such as employees, customers, communities, and governments as a metric of corporate performance. Some examples include:
- Employee diversity
- Workplace policies
- Discrimination lawsuits
- Union relations
- Significant worker involvement and participation in management decision-making
- Good employee benefits that include programs to help employees balance work and family concerns
- Compensation based on performance
- Employee stock ownership programs
- Job training for employees at all levels
- Diversity and workplace policies
- Labor standards
- Supply chain management
- Product safety and usefulness
- Customer privacy
- Community impact
Governance screening considers the short- and long-term impact of board decisions on shareholders and other stakeholders. Items that fall under monitoring may include:
- Board structure
- Board composition
- Executive compensation
- Political contributions and lobbying
- Bribery and corruption policies and oversight
- Strategic sustainable oversight
- Auditor appointment and independence
- Voting rights among shareholders
- Significant issues that concern social and environmental matters
Why Is Sustainable Investing Relevant?
Climate change, concerns over corporate social responsibility, and corporate governance are becoming more of an interest to investors. We are able to explain these complex topics to clients in a straightforward and concise way.
Investments are subject to risk, including the loss of principal. Environmental, social, and governance (ESG) criteria are a set of non-financial principles and standards used to evaluate potential investments. The incorporation of ESG principles provides a qualitative assessment that can factor heavily into the security selection process. The investment’s socially responsible focus may limit the investment options available to the investor. Past performance is no guarantee of future results.