Sustainable investing is the idea that businesses can provide a net benefit to our society through their services or products and that by investing in these businesses your investments will be able to provide a more predictable and consistent earnings stream. This approach evolved out of socially responsible investing (SRI) which used negative screens to take out specific companies or sectors (alcohol, tobacco, guns, etc.). Sustainable investing funds typically use some negative screens, but also deploy research among companies to pick the “best of breed” within an environmental, social and governance (ESG) framework.
Using the ESG framework, funds will usually rank peers based on the three standards of environmental, social, and governance, then invest in the stocks of companies that have better scores and not invest in the stocks that have lower scores.
For example, in the environmental framework water scarcity is a topic to analyze. When comparing two bottling companies, one may use less water during the botting process. This is not only environmentally friendly but also good for profits, as it uses less of a costly resource. When analyzing social frameworks they may look at labor standards – for example sweatshops or workplace safety, which could reduce productivity, increase lawsuits or cause a public relations nightmare. On the governance side they will look at the board of directors and chiefs to make sure they are transparent and follow best practices. The idea here is to try and avoid corporate scandals that would send a stock price plummeting – think of Enron, Wells Fargo or Volkswagen. As shown from these examples, ESG not only can steer your portfolio to hold companies that use standards and practices that you believe in, but also to invest in companies that have more predictable and lasting earnings.
