Companies should only partner with investors willing to reward them for creating long-term value for our society as a whole. And luckily, the way investors evaluate companies is changing as they look towards Sustainable Investing that consider environmental, social and governance (ESG) issues. Large corporations will feel the change the soonest, and it won’t be long before mid-cap companies come under scrutiny as well.
Most leaders understand that businesses play a role in tackling ESG challenges. But many of them also believe that pursuing a sustainability agenda runs counter to the wishes of their shareholders. And the impression among many businesses and leaders is that environmental and social issues just haven’t yet gone mainstream in the investment community. That perception is outdated. As part of a study, recent interviews of over seventy senior executives at some of the world's largest institutional investment firms found that it was almost universally top of mind for these executives.
Although investors have been voicing concerns about sustainability for several decades, it's not until recently have they translated their words into action. Most of the investment leaders in the study described meaningful steps their firms are taking to integrate sustainability issues into their investing criteria. So it's clear that corporate leaders will increasingly be held accountable by shareholders for their efforts and contributions as it relates to environmental and social issues.
So what is Sustainable Investing? It encompasses strategies that can be used in combination. Here are seven common ones:
1) Negative/exclusionary screening (eliminating companies in industries or countries deemed objectionable )
2) Norms-based screening (eliminating companies that violate some set of norms, such as the Ten Principles of the UN Global Compact)
3) Positive/best-in-class screening (selecting companies with especially strong ESG performance)
4) Sustainability-themed investing (such as in a fund focused on access to clean water or renewable energy)
5) ESG integration (including ESG factors in fundamental analysis)
6) Active ownership (engaging deeply with portfolio companies)
7) Impact investing (looking for companies that make a positive impact on an ESG issue while still earning a market return)
Inspired by: Harvard Business Review - The Investor Revolution, by Robert G. Eccles and Svetlana Klimenko