Climate change is one of the greatest threats that humankind face today. Droughts have become common and extreme around the world, and rains are harsher. The world today understands that climate change should be stopped, or it will lead to a catastrophe.
But at the end of the day, the onus is on every individual to do their part. Smaller initiatives by individuals can have a long-lasting, collective impact. Sustainable investing is one such initiative that you can take up if you are an investor. Let us learn more about sustainable investing and see how beneficial the same can be for you in your financial planning and the environment.
Sustainable Investing
Sustainable investing is a style of investing in securities or mutual funds where you aim for financial gains along with social and environmental sustainability. You can combine the traditional investing approach by considering but by considering the environmental and sometimes social affect your investment could have. For that, you can consider the long and short-term contributions the company has towards environmental and not financial gain alone. Similar to technical or fundamental analysis of a company, investors can also do research about the contributions of the company for a better environment. The idea is that this will help promote sustainable activities in a broader sense.
Sustainable investing strategies
While the end goal for every sustainable investor is the same, there could be clear motives or aims as well. For instance, a particular group of sustainable investors may exclude companies that pollute the environment. Below are some such strategies.
Negative/exclusionary screening: Similar to the above example, this screening excludes certain companies or sectors from portfolios. This could be directly or indirectly related to the environmental impact these companies or sectors have.
Positive/best-in-class screening: In this strategy, instead of excluding, you may try to include companies that are environment-positive. This could include investing in sectors or companies that promote good environmental practices. The electric vehicle segment could be a good example of this & investing in mutual fund of such companies will be a great option.
How is sustainability impact gauged?
To decide best on what stocks to invest in and what stocks to not, you should be able to gauge the sustainability impact. Below are a few gauges you can use for the same.
Environmental: You can first gauge how environmental-friendly the company is. This includes the carbon footprint the company has, usage of natural resources including water, treatment of waste, and impact of the company’s product or service on the environment.
Social: You can also measure the social impact the company has. This includes many factors, such as how diverse the company’s workforce is, its stance on social issues, how it advocates for social issues, how it treats its employees, etc.
Governance: How the company is governed is also an important factor. You can analyze how the management of the company has reacted to social issues, what option or stance did they take, etc.
Based on the above factors and the type of investment you make, you can fall into either of the below two types of investors.
Activist investors: Activist sustainable investors are those who invest to make a change. There are different levels of activist investors. For instance, there are a group of investors who tries to gain enough shares to have a say in the governance of the company, and there are investors who invest in companies that strive to bring social or environmental change.
Impact investors: Impact investors are those who try to make an impact with their investing. This includes investors who invest in companies run by the minority.
Conclusion
Sustainable investing is a social movement, but it has some limitations when it comes to personal finance. Make sure you understand the same and choose an investment option for better results. If you are planning for a SIP investment, ensure to use a SIP calculator to make the math easier for you.
