Investing practices or methods that focus on socially responsible and ethical strategies
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Sustainable investing is the practice of making capital allocation decisions based on socially responsible and ethical strategies to ensure that portfolio companies maintain a high standard of sustainability principles. Investing through ESG (Environmental, Social, and Governance) principles constitute part of sustainable investing and have become increasingly popular over the years.
Investors want to do their part in growing their capital with companies that take a long-term view of how their practices affect the environment and the world they operate in. Sustainable investing using the framework of ESG investing is helping to facilitate a new frontier for investors. It provides a choice in the marketplace with an increasingly attractive option for investors to grow their wealth or personally involve themselves in the push towards sustainable business practices.
Summary
- Sustainable Investing consists of three primary areas – environmental, social, and governance.
- Sustainability-focused investors wish to advance environmental, social, or governance principles, as they see value in bringing about positive change.
- Sustainable investing comes in many forms, including stock purchases of eco-friendly companies or investing in the formation of a non-profit.
Sustainable Investing – The New Frontier
Many funds and brokerages are taking on the challenge of making choices that look at sustainable investing practices. The ideas and principles are finding their way into even some of the world’s largest funds and financial institutions, as the importance of such principles in society is growing. Many capital contributors are putting pressure on asset management firms to adhere to more rigorous ESG investing standards.
Investors that look towards exchange-traded-funds ETFs and securities that hold true to such ideals are often motivated not purely by profit, but by the ethical drive to contribute financially towards moving the world to a more sustainable and ethical future for generations to come.
Values-Based Investing
Sustainable investing comes in many forms. Whether it is the purchase of a stock of a company that manufactures solar panels or biofuel or whether one is participating in a community loan fund, there are different methods of sustainable investing.
At its core is the desire to use money to bring about social change and good. The investor wishes to advance environmental, social, or governance principles, as they see value in bringing about positive change.
Below are some of the different types of sustainable investors in the marketplace:
- Development banks that serve lower-income communities
- Pension plans that support environmentally-conscious corporations
- Religious institutions
- Non-profit foundations
- Socially-conscious individuals
Environmental, Social, and Governance (ESG)
The three main subheadings under sustainable investing are environmental, social, and governance. They represent the different types of investment areas that fall under sustainable investing.
Environmental investments closely examine the way a company considers non-renewable resources, climate, and the move toward clean energy.
The social aspect of sustainable investing looks at causes that consider human rights and diversity concerns. They include topics like gender equality and support for underprivileged communities.
The governance aspect of sustainable investing looks to companies that promote business ethics, as well as trust, transparency, and compliance in the marketplace. They are companies that perhaps make ethical business practices one of their top priorities. In such companies, ethics are a central focus, and profits are not the central theme of their corporation or institution.
Ethics is an increasingly relevant topic in the world of business, as the way corporations conduct themselves as global actors is seen with increasing importance. Unethical labor practices overseas are often met with negative media attention and are often the cause for consumer and investor uproar towards management and leadership. The topics attract investors because they see the positive influence their investments can have on the marketplace.
Additional Resources
CFI is the official provider of the certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
- Introduction to ESG
- Corporate Social Responsibility (CSR)
- Morningstar Sustainability Rating
- Income Investing
- Voluntary Simplicity
- See all ESG resources
- See all capital markets resources
FAQs
Sustainable investing directs investment capital to companies that seek to combat climate change, environmental destruction, while promoting corporate responsibility.
What is a sustainable investment? ›
Derived from this definition of sustainable development, sustainable investing is broadly defined as the practice of using environmental, social and governance (ESG) factors when making investment decisions about which stocks or bonds to buy.
What is an example of a sustainable investment? ›
Select specialized sustainable ETFs
Some exchange-traded funds focus on specific sustainability themes like renewable energy, water conservation, or gender equality. Example: Buy shares of the “Invesco Solar ETF (TAN),” which invests in solar energy companies.
What is ESG versus sustainable investing? ›
ESG refers to a set of criteria used to assess a company's environmental, social, and governance impact. In contrast, sustainability is the capacity to maintain or endure, focusing on the interplay of environmental, social, and economic factors. While both terms overlap, they have different scopes and focuses.
What qualifies as sustainable investment? ›
“Sustainable investment” means an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its ...
What are the cons of sustainable investing? ›
Higher Management Fees. A common argument against socially responsible investing is that fund managers tend to charge more in fees than they would for conventional funds, a fact that can negate higher returns.
Is it worth investing in sustainability? ›
Enhancing Reputation: Sustainability plays a decisive role in #consumer behavior and public opinion, especially among young people. High-tech companies can improve their reputation, attract socially responsible investors and customers, and gain a competitive edge.
How does sustainable investing work? ›
Sustainable investing balances traditional investing with environmental, social, and governance-related (ESG) insights to improve long-term outcomes. In many ways, sustainable investing can be seen as part of the evolution of investing.
How to be a sustainable investor? ›
Sustainable investing is an investment approach that considers environmental, social and governance (ESG) criteria in addition to traditional financial factors. Environmental criteria might include factors like a company's carbon footprint, resource use and energy efficiency.
Is ESG good or bad? ›
Companies with a low ESG score are thought to have the worst environmental, social, and governance impacts. Undesirable ESG scores have also been linked to rising poverty levels in the communities where the firm operates, as well as poor employee mental health.
ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws.
Why is everyone investing in ESG? ›
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.
What income is sustainable? ›
Sustainable income means the income that is made steadily and consistently over a period of time. More that that, it means the income level is likely to go on into the future. In a business, Items on the Income statement must be scrutinized to see if they are sustainable of not.
What is the sustainable investment rule? ›
The sustainable investment rule states that public sector net debt as a proportion of gross domestic product (GDP) will be held over the economic cycle at a stable and prudent level.
What are the pillars of sustainable investment? ›
The Three Pillars of Sustainable Investing Explained
These three pillars are economic, environmental, and social. While every investor should define the criteria that they choose to use themselves, we have given you a general guideline below.
How does sustainable investment work? ›
Sustainable investing is an investment approach that considers environmental, social and governance (ESG) criteria in addition to traditional financial factors. Environmental criteria might include factors like a company's carbon footprint, resource use and energy efficiency.
What is sustained investment? ›
Sustainable investing refers to types of investments that aim to generate long-term financial returns while advancing sustainable outcomes.
What is a sustainable investment product? ›
The SFDR defines sustainable investment as "an investment in an economic activity that contributes to an environmental or social objective, provided that the investment does not significantly harm any environmental or social objective and that the investee companies follow good governance practices".
