There has been widespread adoption of sustainable approaches to investing over recent years.
Investors have historically been reluctant to adopt a sustainable investing approach due to performance concerns. Many studies have shown this concern to be misplaced.
What is sustainable investing?
The idea is simple: classify companies in terms of how they manage their environmental, social and governance (ESG) responsibilities. Then favour those that score well over those that score poorly.
To appreciate the scope of sustainable investing, it is necessary to have some knowledge of the ESG components. Each ESG component – environmental, social and governance is made up of several constituent criteria. A company’s management of its ESG responsibilities is measured by aggregating its scores on each of its components.
The following are examples of the criteria relevant to each of the ESG components:
- Climate Change & carbon emissions
- Air & Water Pollution
- Energy Efficiency
- Waste Management
- Water Scarcity
- Biodiversity & deforestation
- Gender & Diversity
- Human Rights
- Labour Standards
- Employee Engagement
- Customer Satisfaction
- Community relations
- Board Composition
- Executive Compensation
- Audit Committee
- Bribery & Corruption
- Lobbying activities
- Political Contribution
ESG components cover a wide range of areas, some of which are less relevant to one company versus another. For example, air and water pollution will be an important element in measuring the environmental impact of a power generation utility. The same element will have less bearing on a technology company.
While there are several approaches to sustainable investing, inclusion-based is one the most diversified of these. The starting point is the eligible universe of companies for the strategy. An inclusion-based approach applies the sustainability criteria to this universe by adjusting the weights of the constituent companies, increasing investment in more sustainable companies and reducing investment in less sustainable firms. Companies with extremely poor sustainable records may be excluded, but typically all sectors are represented. This can be considered a best-in-class approach as it leads to a well-diversified portfolio with sensible portfolio characteristics.
Satis Wealth Management and sustainable investing
We have been at the forefront of financial adviser research into sustainable investing for several years and were part of the founding of Worthstone, a leading independent social impact investment resource for financial advisers.
We look to engage all clients in a conversation in regards to sustainable investing and educate you on the principals behind it.