A Sustainability Synonym: What is ESG investing?
This article will provide you with relevant insights into the world of sustainable investing and the meaning of ESG. We will talk about widely used sustainability synonyms. Furthermore, we will cover questions such as “What is ESG?”, “What is impact investing?” and “What is ESG factors to use?”. After you have read this article, you will be able to understand the basic principals of ESG investing.
An Introduction to Sustainable Investing and Sustainability Synonym related Definitions
Definition and sustainability synonym
Most likely you have already heard one of these sustainability synonym related terms for ESG investing:
- Sustainable investing
- Environmental-friendly investing
- Socially responsible investing
- Green investing
At the moment, there is no commonly accepted definition available in the market. The terminology used varies broadly between banks, asset managers, regulators and the general public. Regulations such as the Sustainable Finance Disclosure Regulation (SFDR) or the EU Taxonomy started an initial attempt to provide more precise definition. But it is still a long way to go until the definitions reach mainstream.
In general, “sustainable investing” is a type of investment strategy that considers environmental, social, and governance (ESG) factors in the investment process. These factors are considered along traditional financial data such as fundamental company information. Sustainable Investing is becoming increasingly popular among investors. As a result, investors are looking for ways to align their investments with their values and make a positive impact on the world.
Over the past few years, the popularity of sustainable investing has been on the rise. More and more investors are recognizing the long-term benefits of investing in companies that prioritize sustainable practices. This is not only good for the environment and society, but it can also lead to strong financial returns in the long run.
Why does it matter?
According to a recent report published by PwC in October 2022 (read more here), sustainable assets under management (AUM) reached $18.4 trillion globally in 2021, which represents 21.5% of total assets. This trend is expected to continue as more investors are becoming conscious of the impact of their investments on the environment and society. Also, the growth perspectives are significant. It is expected that that ESG-oriented assets would grow in the USA from $4.5 trillion to $10.5 trillion in 2026.
Sustainable investing is not a niche market anymore and it’s becoming mainstream. Many financial institutions are now offering sustainable investment options, and more and more companies are disclosing their ESG performance. The increasing amount of ESG data made available helps the financial services industry to develop more reliable products and services.
What is this article about?
In this article, we will explore the true meaning of ESG and sustainable investing. This includes the what and why as well as how to incorporate it into your investment strategy. With the increasing popularity of sustainable investing, it’s important to understand the basics, and how it can be incorporated into a well-diversified investment portfolio.
What is the meaning of ESG investing?
Sustainable investing is the process of considering environmental, social, and governance (ESG) factors in the investment process. This type of investing is also known as socially responsible investing or ESG investing. It focuses on investing in companies that prioritize sustainable practices. One of the biggest challenges is that the term “sustainable investing” is difficult to define. “Sustainable” doesn´t necessarily mean that the underlying company is fully sustainable. Sometimes, financial institutions use the term “sustainable” already when an investment complies with certain exclusion criteria, performs better in regards to ESG factors than their peers and a certain percentage of revenue can be linked to a Sustainable Development Goal (SDG). This definition challenge is currently tackled by regulators around the globe to provide establish a common framework and understanding.
When evaluating companies for sustainable investing, investors consider a wide range of ESG factors. Some examples include the company’s impact on the environment, labor practices, community engagement, and governance. Consequently, the goal is to invest in companies that make a positive impact on the world, and that are committed to creating a more sustainable future.
Sustainable investing is important for a number of reasons. It allows investors to align their investments with their values and make a positive impact on the world. It also helps to mitigate risks and capitalize on opportunities in the long-term. Companies that prioritize sustainable practices are more likely to be better equipped to handle risks and capitalize on opportunities, which can lead to strong financial returns in the long run.
Additionally, sustainable investing can help to address pressing issues such as climate change, human rights, and fair labor practices. By investing in companies that are working to address these issues, sustainable investors are helping to create a more sustainable future for everyone.
Selected examples of companies as sustainability synoym
This section should provide you with a few examples and explanations why certain companies can be considered as sustainable. Nevertheless, it is not always a straight-forward argumentation. Especially for Tesla Inc., the contribution to clean energy and transportation needs to be balanced against the usage of resources, labor practices and business conduct behavior.
A clothing and outdoor gear company known for its commitment to environmental sustainability and corporate responsibility. The company uses organic cotton, recycled materials, and sustainable production methods to minimize its impact on the environment, and it actively works to conserve wild places through activism and support for environmental organizations.
Allianz is a financial service company that has committed to achieving net-zero emissions by 2050, and to aligning its portfolio with the Paris Agreement on climate change. Also, Unilever, a consumer goods company has set ambitious targets to become carbon-neutral in its operations by 2030, and to halve the greenhouse gas impact of its products by 2030.
Microsoft has set a goal to become carbon negative by 2030 and has been investing in renewable energy and energy efficiency initiatives. Microsoft is also committed to promoting diversity, equity, and inclusion in its workforce and supply chain, and is a leader in using technology to support social and environmental causes.
These are just a few examples of companies that have strong ESG practices, but there are many more out there.
The three pillars of ESG investing
In recent years, financial institutions developed various approaches to categorize ESG investing styles. As there is no common framework or global regulation available, the approaches differ slightly from financial institution to financial institution. In practice, the following three ESG investing categories were established: Exclusions, Best-in-class and Impact Investing.
Exclusions or Negative Screening
Exclusions or negative screening became a common practice in the construction of socially responsible portfolios for many portfolio managers. Current industry practices differentiate the following three types of negative screening criteria.
Norms-based Exclusions & Screening
Norm-based screening criteria exclude companies that fail to comply with international treaties on controversial weapons such as the Convention on Cluster Munitions, the Chemical Weapons Convention, the Biological Weapons Convention, the Treaty on the Non-Proliferation of Nuclear Weapons (NPT). In addition, socially responsible portfolios usually consider exclusions recommended by industry associations such as e.g. the Swiss Association for Responsible Investments (SVVK-ASIR) with respect to anti-personnel mines, cluster munitions and nuclear weapons (outside of NPT).
Values-based Exclusions & Screening
Asset managers exclude companies that derive more than 5% of their revenue from conventional weapons and firearms, tobacco production, gambling, or adult entertainment. Furthermore, companies that derive more than 20% of their revenue from tobacco distribution or conventional weapons support systems and services will be excluded. In addition, a revenue limit of 20% is usually applied to investments in coal (coal mining and coal-based electricity generation), a revenue limit of 5% in arctic oil and gas as well as a revenue limit of 10% in oil sands.
Business-conduct Exclusions & Screening
Business-conduct screening is not consistently implemented across investors and leave space for individually defined policies. Usually, companies found to systematically violate international norms or breach other individually defined criteria of an investors are continuously monitored. Depending on the measures taken by the companies and the willingness of the management to adopt changes, the investee company may be excluded from the portfolios or not. Engagement strategies are often used by asset manager to drive a positive behavioral change.
"Best in class" approach
A “best in class” ESG approach in an investment portfolio refers to the strategy of selecting investments based on the highest ESG (environmental, social, and governance) standards within a particular sector or industry. This approach is based on the belief that companies with strong ESG practices are more likely to achieve long-term financial success and stability compared to those with weaker ESG practices.
Adopting a best-in-class ESG approach in an investment portfolio is a way to prioritize sustainability and social responsibility while also seeking to achieve financial returns. When using this approach, investors focus on investing in companies with the highest ESG scores within a given sector, and exclude those with the lowest scores. This allows investors to align their investments with their values and make a positive impact on the world.
To implement a best-in-class ESG approach in an investment portfolio, investors must first identify their ESG priorities and consider how they align with their overall investment goals. Next, investors must research and evaluate the ESG practices of companies within their selected sectors to determine which have the strongest ESG practices.
Investors can also use ESG ratings and rankings provided by organizations such as MSCI, Sustainalytics, and S&P Global, to help identify companies with the highest ESG scores within a particular sector. It’s important to note that these rankings and ratings can vary, so investors should consider multiple sources and cross-reference the information.
Impact investing is a form of sustainable investing that focuses on investing in companies, organizations, and funds that are working to generate measurable, positive social and environmental impact alongside a financial return. It is prevalent in various sectors that are working to address pressing global issues such as poverty, climate change, and access to healthcare.
One sector in which impact investing is prevalent is renewable energy. Investing in companies that are working to reduce dependence on fossil fuels and increase the use of renewable energy sources can help to mitigate the risks associated with climate change.
Another sector where impact investing is prevalent is clean technology. Investing in companies that are developing clean technology solutions, such as energy efficiency and water treatment, can help to promote sustainable practices and reduce the environmental impact of industrial processes.
Microfinance is another example where impact investing is prevalent. Investing in microfinance organizations can help to provide access to financial services to people who are not served by traditional financial institutions, and can help to promote economic development in low-income communities.
These are just a few examples of sectors where impact investing is prevalent, but there are many more out there. As impact investing is quite difficult to achieve through simply selecting publicly listed companies, impact investing strategies are usually closely tied to private equity-, infrastructure- or venture capital funds.
Summary and Conclusion
In summary, this article has discussed sustainability synonym related terminologies, sustainable investing and its increasing popularity. Sustainable investing or ESG investing is a way to align investments with values and generate positive social and environmental impact. The article has tried to define “sustainable investing and pointed out the different sustainability synonyms. Additionaly, its importance for investors and banks has been highlighted. The article has also discussed Environmental, Social, and Governance (ESG) criteria, which are key factors used to evaluate the sustainability of a company and its practices. The article outlined the three different approaches of exclusions, best-in-class and impact investing.
It is important to note that sustainable investing does not necessarily mean sacrificing financial returns. In fact, many studies have shown that sustainable investing can lead to competitive financial returns, as well as providing investors with the added benefits of promoting positive social and environmental outcomes.
In conclusion, sustainable investing or any of its sustainability synonyms can be seen as complementary to traditional investing. Both approaches come with their own benefits and trade-offs. While traditional investing focuses solely on financial returns, sustainable investing seeks to generate financial returns while also promoting positive social and environmental outcomes. By considering both the financial and non-financial impacts of their investments, individuals can make informed investment decisions that align with their values and investment goals.