Sustainable investing has caught the attention of those interested in protecting the environment. The potential pluses seem very attractive — companies become more forthcoming about their activities while the planet profits from decreased harmful activities. However, is this investing method really doing what it is supposed to? Here’s what potential investors need to know.
What Is Sustainable Investing?
Sustainable investing – also called ESG (environmental, social, and governance) – means looking at the company’s overall contributions before deciding to invest in it. Investors look at these three factors when determining if the business is helping the planet. They consider the criteria and see how they match their standards when making their decisions.
This factor focuses on the ecological effects a company has on the Earth. Investors may choose to only contribute to businesses dedicated to eliminating their carbon footprint and protecting local habitats, similar to how many consumers consider environmental effects when buying a product due to the current focus on climate change.
When considering the environmental factor of sustainable investing, people should ask themselves what kind of good or bad the business could do with investors’ money.
When considering social criteria, investors look at how a company treats its customers and employees. How is it working to protect data? Does it violate any human rights? Does it find diversity across all spectrums necessary? Are employees safe and treated fairly in factories? Investors look to promote the well-being of everyone involved in the company when choosing to invest in businesses based on the social factor.
The governance factor asks businesses to be transparent about who runs them and where their money goes. This could involve their political interests, any bribes they’ve offered in the past and how much they pay the executive board. Investors tend to trust companies that freely disclose this information — no one would feel comfortable giving money to a business that clearly has something to hide.
Recent Growth in Sustainable Investing
More households now show interest in changing how they spend their money. While 13% of carbon emissions come from residents, nearly double that comes from industrial sectors.
Transportation and electricity are also significant contributors. These corporations use much more than the average person, so many investors want to ensure those using the most start cutting back.
Because climate change has become a focus in many people’s minds, they are looking for ways to make a difference. They’ve found investing to be a viable option. A Global Sustainable Investment Alliance study found a 15% growth in sustainable assets in 2020. Now valued at $35.3 trillion, they believe sustainable investing makes up 36% of investments. With this level of market control, new consumers are seeing how their money can make necessary changes.
However, businesses worry about the potential losses of going green. Although sustainable investments such as solar panels can save them as much as 75% of their typical energy bill a month, installing these materials does cost them a bit more — and consumers aren’t always interested in footing the bill. However, if organisations begin calculating gains and losses with their environmental impact, they will see these costs go down.
Benefits of Investing Sustainably
Sustainable investing might be a good option if you want to change how you invest your money. For example, you may choose to start focusing on companies relying on renewable energy for its low environmental and power costs. Diversifying your portfolio reduces the risk of losing a lot if one of your investments does poorly. While looking for new ventures to invest in, consider finding a few environmentally friendly businesses that are candid about their practices. Doing so may influence more places to follow that company’s lead.
People want to know if companies are working to combat climate change. The health of the human race depends on it. The World Health Organization anticipates 250,000 more deaths annually from 2030 to 2050 due to climate-related stressors. It affects air quality, home reliability, water safety and food security. Businesses can do a better job reducing these problems if they commit to change. Sustainable investing can help them keep their word.
Climate change also affects the environment and animals. Many species are struggling to survive with the intense changes to their habitats. The 10 warmest years on record have all happened since 2005, seven of which have been since 2014. The ice caps are melting, increasing sea levels and harming the animals who rely on them. Individuals are responsible for reducing their greenhouse gas emissions, but big corporations have to cut back on theirs even more. Investing sustainably helps ensure they do.
Will It Truly Make a Difference?
There are some valid criticisms lodged against sustainable investing. The first is that companies are charging extra for being environmentally responsible. Morningstar calls this a “greenium,” meaning businesses know investors are often willing to pay more if they see a product or service is sustainable. This is hard for new investors to manage since they might not be starting with enough to invest for that price. Being green can cost companies more, but it’s hard to know if they are raising their prices fairly.
The other unfortunate truth is companies can misconstrue how they report information. One study found that ESG ratings rely only on how much a business willingly divulges. However, this does not affect whether they follow through on their promises. In fact, a study found that ESG mutual funds often had little to no compliance with environmental and labor laws. These companies might be releasing data on their carbon emissions, but they have not correlated with how much they actually produce.
Sadly, many sustainable investors might not be investing as consciously as they thought. However, changes to this system are in the works. In early 2022, the U.S. Securities and Exchange Commission proposed a new rule requiring all companies to reveal any climate-related risks they pose. Additionally, they would have to notify investors of how the changing environment may affect their business.
More governments should impose such rules. After all, why should it be legal for a corporation to lie to its investors? This kind of truth obstruction will cause consumers to lose trust quickly. Once that happens, organisations will start to shed customers and potentially face investigations into their other practices. Laws should enforce how often they must publicise environmental reports and create methods for testing all industries.
Lawmakers must identify and follow through on punishments to make these rules truly effective. Business leaders will likely only follow regulations if they want to avoid harsh penalties. Their actions do not only impact them — they affect the planet’s survival. Enforcement of these policies should be rigid and mandatory to ensure investor trust and environmental protection.
The Possible Rise of Sustainable Investing
Investing sustainably could be one of the most considerable ways consumers influence the market. However, regulations on how businesses report their carbon emissions and costs must be enacted. Investors base the ESG method entirely on trust, so companies owe it to consumers to act in a trustworthy manner.
Governments have started creating policies requiring organisations to report their environmental impacts honestly and transparently. Most recently, the U.S. Securities and Exchange Commission (SEC) proposed rules that would crack down on unfounded claims of funds’ ESG credentials. With these rules, investment advisors would have to follow specific outlines on how they can market ESG funds and provide specific reasons behind labels.
This is a good first step, though there need to be strict consequences if a business chooses to hide or fabricate its documentation — the Earth can’t afford these big entities to take a mere slap on the wrist. Once they become genuinely transparent, everyone could influence how these companies affect the environment.