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Page Author: Evan Hughes CFP
Sustainable Finance / Sustainable Investment
Sustainable Finance can be segmented into various sub sections. Finance can mean lending, so Sustainable finance can mean lending for sustainable purposes. Finance can also mean investing, so Sustainable investing means investing for the future in a sustainable way. It is the latter that is generally inferred when discussing sustainable finance.
Some of the jargon and acronyms you may encounter are:
SRI: Socially responsible Investing
Responsible Investment
E.S.G: Environmental, Social, and Governance
Impact Investing
Green Bonds / Green Investing / Green Finance
All of these styles do have their own particular attributes, however as an umbrella term, Sustainable Investing is an easy way to describe them all.
Traditional investing does not take into consideration the externalities or side effects of its investments. Traditional fund managers are only interested in maximizing returns, regardless of the costs to the environment or society. Government regulation on companies was the only tool available to prevent reckless corporate behaviour. As we have seen over the last few decades, this was not enough to promote positive corporate actions and ethos in all cases.
Sustainable finance & investing is a response to this. Governments, regulators, and people like you have become more aware of the pitfalls of traditional investing and have started to hold investment fund managers and companies to a higher standard.
In practice, the application of sustainable investing can take various forms, however, responsible investment is a proven tool to future proof your portfolios.
How does it work?
In sustainable finance, typically we remove the negative industries or companies from the fund. That is, to screen out high climate change contributors like coal, oil, and gas companies or bad actors like tobacco and weapons companies. Most individuals on the high street would likely agree with this strategy as they feel it would line up with their own personal moral judgments when investing.
A sustainable finance manager must then make positive selections to invest in. There may be a preference towards green energy, cleantech, health care, or other industries that have a positive effect on the environment or society stop. A sustainable finance manager does not disregard classic portfolio theory or prudent fund management. They are still bound by the fundamentals of diversification, risk reduction, and profit maximization; however, they aim to do it in a sustainable way which reduces negative outcomes for the environment and society and promotes positive ones.
A large part of sustainable finance is to engage with all of the companies in the middle who are neither explicitly good or bad. A sustainable finance fund manager will engage on an ongoing basis with the companies that are selected to be in the fund so they continue to set and meet sustainability goals. If engagement falls short of achieving the desired outcomes, a sustainable finance manager can choose to vote against the board at shareholder meetings. As a last resort a sustainable fund manager can't hold uncooperative management teams to account by divesting their shares from the fund will stop this ultimately results in a fall in share value which is the strongest metric of performance of a CEO. If managed correctly and responsibly, a sustainable fund manager can yield enormous power to change corporate behavior over time.
From the client's perspective, having access to a sustainable finance manager or fund generally makes sustainable investing a lot easier and more accessible. The difficulty for a non-professional individual is how to invest sustainably, which companies to choose, which investments to avoid and it can be difficult to achieve a balanced portfolio. The number of sustainable funds in Ireland are growing as awareness increases with fund providers that the public are seeking sustainable options through their pensions and savings going forward.
At Ethico, we are happy to advise and give clear comparisons between the various types of sustainable finance and show you how to avoid "greenwashing". As stainable finance has become more popular we have seen an increase in the amount of companies who wish to promote there sustainable credentials. This has led to somewhat of an arms race to be greener than green. It can be difficult to fully dissect each provider or fund and know for sure if their investment philosophy aligns with your own personal morals. Your Ethico adviser can guide you to genuinely sustainable finance options.
If you wish to discuss Sustainable investing in more detail, please make contact and one of our advisors will discuss your options in plain language with no jargon.