The art of sustainable investing

Why do investors invest, and companies do business? To make money, obviously. It’s an answer that keeps life simple and makes it easy to tell winners from losers. But the world has never been that straightforward: investment has always involved more than just profit and loss. Great fortunes, huge companies and powerful nations were built on slavery, but society’s willingness to accept this form of institutionalised barbarism as the price of economic progress ran out long ago. The abolitionists may never have encountered the term “responsible investment,” but they surely contributed to its bloodline.

Examples such as theirs should come as a rebuke to those who regard responsible investment, sustainability or concern for ESG (environmental, social and governance issues) as fads. Sure, sustainability is now a buzzword in investment, but people didn’t start caring about these issues yesterday. 

It is probably more accurate to argue that the investment industry’s increasing focus on sustainability reflects a realisation that in previously failing to give due weight to these issues, it fell out of step with its public, particularly younger people. According to research last year by the US investment bank Morgan Stanley, 86 per cent of US millennials are interested in sustainable investment. “Millennials are also twice as likely to invest in a stock or a fund if social responsibility is part of the value-creation thesis,” Morgan Stanley added. Larry Fink, chief executive of the world’s biggest fund manager, BlackRock, recently argued that companies must “make a positive contribution to society.” 

Many would agree, but making it happen is tricky given the daunting breadth of issues that fall under the sustainable investment banner: from protecting the environment and reducing carbon emissions to improving working conditions in developing world factories, and addressing workforce diversity and the gender pay gap, to name just a few. 

In many cases, sustainability involves investing in a process of cultural change, as companies progressively improve their performance on a wide range of issues. That demands continuous monitoring, impossible for a DIY investor. It’s made doubly tricky by the rise of passive index trackers that give investors the benefit of low fees but are obliged to hold companies regardless of their sustainability record, simply because they figure in an index. 

Part of the answer lies in the development of indices based on sustainability factors, an increasing number of which are appearing. But for many DIY investors, the simple way to address the ESG agenda is to invest in assets that promote sustainability goals such as renewable energy, and to avoid the traditional villains such as tobacco, booze, gambling and weapons manufacturers. Beyond that, we must all rely on the professionals who manage our pensions and investments to make ESG a central part of their approach and to push for change. 

Most of us spend far more on our daily needs and wants than we invest, meaning the biggest impact we can have is in the choices we make as consumers. But this in no way implies that our decisions as investors are less important—investment is fundamentally about the future, and always involves making choices about what kind of future you want to see.