Definition of Sustainable Investing

Jan 16, 2024 By Triston Martin

Investing in a manner that benefits society or the environment is an example of sustainable investing, a kind of investment strategy. It may be as easy as staying away from businesses or whole sectors whose goods directly oppose the goals, morals, and principles you hold dear. You can also invest in activities that you feel would get you closer to a certain goal. You could also hear terms such as ethical, impact, socially responsible, and values-based investing used interchangeably with sustainable investing.

According to the research conducted by the U.S. SIF Foundation, the total value of assets that were managed by professionals and included environmentally sustainable practices reached $17.1 trillion by the end of 2019. This represents a 42% rise when compared to the previous two years. In addition, according to estimates provided by the organization, professional management invests sustainable practices for one dollar out of every three dollars.

However, the origins of what is now known as socially responsible investing, or SRI, may be traced back hundreds of years in the United States. Because they refused to take part in the slave trade in the 1700s, Quakers connected with the Religious Society of Friends are frequently recognized as being early practitioners of abolition. More recently, socially responsible investors have supported advanced civil rights initiatives.

According to the 2021 Sustainable Funds U.S. Landscape Report published by Morningstar, sustainable funds, on average, outperformed both their conventional counterparts and indexes in the year 2020. Seventy-five percent of sustainable funds finished in the top half of their respective Morningstar category for the most recent three-year period. Fifty-two percent of sustainable equity funds were classified in the highest quartile of all the funds.

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Although the terms are sometimes used interchangeably, there are two primary types of sustainable investing: SRI, which takes an exclusive approach, and environmental, social, and governance (ESG) investing, which takes a more inclusive and inclusive approach. When using SRI, investors can make investing selections by screening based on specified criteria, including funds or equities.

ETFs and mutual funds cater to clients interested in sustainable investing by avoiding investments in particular sectors. For instance, on December 31, 2020, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) had investments in 491 of the 500 firms included in the S&P 500 index. The companies with fossil fuel reserves were excluded from the fund's holdings.

On the other hand, environmental, social, and governance (ESG) investing often takes a more comprehensive and proactive approach by examining due diligence aspects in organizations. For instance, if an oil and gas firm is dedicated to cutting emissions and giving back to the communities in which it operates, then that business may be called a responsible investment. Making ESG investment choices often relies on quantifiable ESG elements that experts have spelled forth. Take, for instance:

  • Environmental concerns include carbon emissions, water usage and conservation, and clean technologies.
  • Concerns relating to society include workplace protections and benefits, community growth, anti-discrimination measures, and diversity concerns.
  • Diversity on boards, corporate political donations, and anti-corruption legislation are all important aspects of governance.

Individual stocks may be evaluated using these variables; however, most mutual and exchange-traded funds emphasize only high-scoring corporations. One example is the Global ESG Select Stock Fund Investor Shares offered by Vanguard (VEIGX). According to Vanguard, this fund is for investors searching for "exposure to firms with excellent ESG practices." However, it is possible that this fund is not the best option for those wanting to remove particular industries or companies from their portfolios.

VEIGX has 38 holdings as of December 31, 2020, with Microsoft being the biggest of those holdings. 4 Microsoft has publicly committed itself to achieve certain corporate social responsibility targets and promoting sustainability.

Then some funds concentrate their efforts on certain societal and environmental objectives. For instance, the VanEck Vectors Green Bond ETF (GRNB) invests in green bonds, in which the interest and principal payments are used to fund ecologically good initiatives. You may also discover funds that invest in advancing causes such as gender equality and clean water, such as the SPDR SSGA Gender Diversity Index ETF (SHE) and the Fidelity Water Sustainability Fund. These types of funds can be found on the market (FLOWX).

What Individual Investors Need to Know About the Meaning of Sustainable Investing

Investors have access to a wide variety of investment opportunities from which they may choose one that is congruent with their core beliefs and guiding principles. Companies are becoming more transparent in their dealings with investors to equip them better to assess investment possibilities in light of the growing popularity of sustainable investing. For instance, public corporations commonly use quarterly earnings calls to successfully convey their environmental, social, and governance (ESG) goals.

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