How Investing in Sustainable Businesses Turned Into A Safe Bet
Companies are no longer just evaluated based on financial metrics like revenue and balance sheet strength. Instead, investors are increasingly looking at sustainability factors, which ultimately play a role in the company’s performance, considering how events like resource scarcity would hurt certain businesses or how certain sustainability initiatives like better energy management could improve profitability. Sustainable investing is now here to stay for good.
In fact, a study of U.S.-based mutual funds and separately managed accounts found that investing based on sustainability “has usually met, and often exceeded, the performance of comparable traditional investments,” according to a Morgan Stanley study. “This is on both an absolute and a risk-adjusted basis, across asset classes and over time.”
More investors are starting to benefit from this performance, with assets in what are known as sustainable, responsible and impact (SRI) strategies accounting for one-fifth of the dollars in professional management in the U.S, according to US SIF: The Forum for Sustainable and Responsible . This SRI market is almost 14 times larger than it was in 1995.
Thus, companies should recognize that if they want outside investment, there is a growing need to incorporate a wide range of sustainability factors like greenhouse gas (GHG) emissions and water usage.
A Push from Global Organizations
Major organizations such as the World Resources Institute (WRI) and the United Nations are making a major push to encourage more investors to incorporate sustainability factors.
WRI, for instance, is working to shift its own assets to companies that incorporate environmental, social and governance (ESG) factors as part of their financial analysis. And through their research and educational efforts, they are also working with investment managers and asset owners to shift their assets to companies that incorporate ESG factors.
Part of that work involves overcoming some of the myths around sustainability investing, such as that investors would be breaking their fiduciary duty to beneficiaries to select the best investments. However, the U.S. Department of Labor clarified that ESG issues “are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices” as it pertains to fiduciaries of plans under the Employee Retirement Income Security Act (ERISA), like most 401 (k)s.
Additionally, the UN has established the Principles for Responsible Investment (PRI), with the first principle being “We will incorporate ESG issues into investment analysis and decision-making process.” The PRI has nearly 1,700 signatories around the world, ranging from New York City teachers’ pension fund to T. Rowe Price. In total, the UN PRI represents $62 trillion.
Why All Companies Should Care About Sustainable Investing
Many business owners at some point will wonder ‘what is sustainable investing and is it right for me?’ Since investing in sustainability is becoming mainstream, companies should make changes now, such as reducing ghg emissions, so as not to be excluded from public and private investment.
Even if they are not looking for investment at this time, companies should be incentivized to improve sustainability to maintain a strong public image. As more people invest in sustainable companies, it will likely create a major shift beyond the financial markets, considering that ordinary consumers could have their retirement assets invested in sustainable companies and be more aware of why sustainability matters.
As such, consumers could then shift even more to purchasing from sustainable companies, whether it’s to support their own investments or because they are concerned about long-term resource availability.
Additionally, companies may face pressure from vendors and other partners to improve sustainability, because if those other companies want to receive investment, the whole scope of their operations matters.
If your company is a supplier to other businesses, for instance, keeping that customer could hinge on your sustainability efforts. So even if sustainability does not seem to be an issue for your company now, it easily could become one as sustainable investing becomes more mainstream.
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