Interest in sustainable investing has grown dramatically in the last decade, as environmental, social and governance (ESG) issues have gained prominence, and investors have come to recognize the materiality of ESG factors to financial performance.
Shifting demographics are also playing a role, with younger investors and female investors seeking out opportunities to align their portfolios with their values.
But sustainable investing is not new. What started out decades – and even centuries – ago as a values-based, exclusionary approach has evolved to include a much broader array of strategies and investment vehicles. This evolution has, to a degree, mired sustainable investing in complexity, and today competing definitions conspire to confound rather than inspire investors.
These five principles are an attempt to simplify some core tenets of sustainable investing. They are applicable to individuals and institutions, and offer perspective about how to be an engaged and effective ESG investor.
- Adopt A Long-Term Investment Mindset
At its simplest, sustainable investing is investing for the long term. Consider the issue of climate change. There are abundant reports of impacts we’re seeing today, including shrinking glaciers, rising sea levels, and more intense weather events. But the effects will become far more pronounced in the coming decades, and this will create challenges and opportunities for companies.
For long-term investors, it’s difficult to make the case today that environmental issues like climate change, as well as social issues like human rights and supply chain management ethics, will not impact their portfolio companies. How companies and other institutions respond to ESG-related challenges is likely to be an important contributor to their long-term performance and viability. Those who acknowledge these issues and adopt proactive strategies to mitigate ESG risks may ultimately deliver better long-term performance.