Tools and Tips
What is sustainable investing and how does it work?
June 7, 2021 | Stephen Phoon
Image by Nattanan Kanchanaprat from Pixabay
What if you found out your investment money is helping to finance oil and gas projects? You then wonder if you should look at other ways to invest. Welcome to the world of Sustainable Investing!
Sustainable Investing (SI) or Socially Responsible Investing (SRI) refers to a strategy of investing in businesses that consider both financial returns, and the social and environmental impact of the businesses concerned. The underlying principle is that responsible investing should have an objective that is beyond maximizing dollars on investments, and that investors should also shoulder part of that responsibility through their expectations and actions.
SI strategy can broadly be categorised into:
- avoiding businesses that are involved with negative social impacts (tobacco, gambling, weapons, child labour, fossil fuel production, etc.)
- favouring businesses that espouse environmental stewardship and social justice
- Investing in businesses that generate positive environmental or social impact (e.g., solar energy production)
SI is also viewed as an approach that invests in businesses with strategies that mitigate against major and long-term risks, such as climate change. These companies take steps to make their businesses resilient to such risks, in addition to exercising responsible environmental practices. The belief is that responsible and resilient companies have reduced financial risks and make better investments.
How does SI help address the climate situation we are facing?
Companies care a lot about their stock values. Top executives’ rewards and remuneration are often tied to it. An appreciating stock price attracts more investors. SI investors can use their role as shareholders to encourage companies to be more sustainable. And conversely, by divesting from non-sustainable companies SI investors can signal their disapproval.
How do you fit into this?
Sustainable investments (funds, portfolios) are more available now than just several years ago, thanks to growing awareness and demand from investors. According to a 2020 survey by the Responsible Investment Association (RIA), 75% of respondents would like their financial services provider to inform them about RI options. Also, RI assets grew almost 50% over two years to $3.2 trillion at end 2019.
Now that you’re a little more informed about SI, does it make you want to take a next step? Here are some ideas of what you can do.
- Get a more in-depth understanding about SI – some good places to start:
- Socially Responsible Investment (Investopedia)
- A guide to socially responsible investing in Canada, and how to get started (Globe & Mail)
- 2021 Eco-Fund Guide: The Ultimate Guide to Responsible Investing (Corporate Knights)
- Attend a webinar on SI and hear different viewpoints from fund managers and investors. Start with Google Search “responsible investment webinars”.
- If you already have investments, find out about their sustainability aspects. Ask your banker or fund manager. And while you are at it, find out about their offering of sustainable investment funds. If there are not any, ask for such offerings, or perhaps it’s time to look for another banker or fund manager.
Stephen teaches and consults on sustainability with a major college in Toronto. He is passionate about catalysing action towards an equitable and sustainable net zero future.