Sustainable investing, a concept that is driven by environmental, social, and governance (ESG) insights, entails investing in progress and approaching funds with a long-term mindset. Instead of prioritising a high volume of short-term profits, sustainable investing projects aim to solve ESG challenges while encouraging growth to reap prolonged rewards. The result is a portfolio that not only considers financial information but each investment opportunities’ holistic value propositions.
The benefits of sustainable investing are a positive feedback loop, as solving ESG challenges drives growth in each respective industry which provides financial returns to investors. In turn, these profits can be further reinvested and diversified into solving a greater number of challenges, ultimately generating even more revenue. The end state is a win-win situation for all stakeholders who commit to ESG initiatives. Of course, all investment opportunities come with a risk and in the case of sustainable investments, the risks are largely capital in nature. ESG-driven sustainable investment tends to draw intensely on capital requirements to impact change, implying that investors and equity firms alike must be ready to weather through the cycles of non-profit.
Some major trends in the realm of sustainable investments that have risen in popularity over the last couple of years involve carbon offsetting as well as measuring biodiversity impact. Significant amounts of effort and funding have gone towards solving issues pertaining to environmental challenges. Climate change and its accompanying consequences have shifted the Overton window heavily and forced large organisations and governments to act quickly.
Sustainable Stocks in the Market
As alluded to earlier, the majority of sustainable stocks in the market currently are tied to climate change policies. A top priority for many investors, this trend was set by large corporations making carbon net-zero commitments in an effort to embrace the inevitable. To be specific, carbon credits and carbon offsetting equities appear highly lucrative and serve as a good starting point for investors just dipping their toes in sustainable investments.
The next set of stocks to keep an eye on pertaining to the S in ESG, socially driven factors. With a greater urgency to improve diversity, equality, and inclusion (DEI) in the workplace, many sectors have pledged to support marginalised communities in 2022. In the wake of the COVID-19 pandemic, tangible effects resulting from a lack of DEI come across as omnipresent regardless of industry. Racial and gender disparities regarding wage differences and opportunities have led to efforts towards finding concrete solutions. In sum, these solutions that require significant investment backing are represented in the form of flexible workplace arrangements, improved skills training, and innovations that empower minority communities to contribute their skills and participate fairly in the labour force.
Along the same notes, gender-lens investing has gained an overwhelming amount of traction in recent years. An approach that integrates gender-based factors into investment strategy, processes and analysis, these operations aim to deliver positive benefits to women and girls worldwide. A growing sector that has garnered attention from sustainable impact investors, evidence continuously stacks up as researchers continue to demonstrate compelling cases for gender diversity in the workforce leading to overall economic growth and improvements to innovation and productivity.
Possible Challenges
At this current point, things aren’t all rainbows and butterflies yet. Disclosure and ESG data remain thorny issues, with concerns of fragmented data and inconsistent disclosure. Combined with the lack of standardisation, investors naturally hold back and appear hesitant to press on full steam ahead.
Furthermore, increasing concerns of greenwashing have led newer retail investors, who are unfamiliar with ESG sustainable investing, to be misled. The practice, which involves the use of certain ESG keywords in portfolios to attain a stamp of approval, has experts concerned that the lack of checks and balances might do more harm than good in the realm of sustainable impact investing. Sustainable investors have been advised to conduct thorough research and do their due diligence before undertaking any potential impact investment funds.
The term “caveat emptor” reminds investors to put the work in and not take anything purely at face value. With the risk that sustainable investing might bear, the opportunities are seemingly far greater and worth the effort. It is an industry going from strength to strength, and 2022 is the perfect time to take the plunge into sustainable investing.
