What is sustainable investing and why does it matter?



Investments that make a difference.

Maddy Guest and Sophie Dicker are the co-hosts of You’re in Good Company, an investing podcast striving to disrupt the norms in the finance industry. An Equity Mates Media production, each week they walk through the basics of the share market, break down all that pesky jargon and interview some of the best investors in the business, so that we can all feel empowered to make our own investment decisions. Find their podcast on Spotify or Apple Podcasts.

Since the turn of the decade, the not-so-roaring 2020s have been just over 18 months of monumental change when it comes to how we get things done. For Australians, 2020 started with the bushfires and was followed by the pandemic and the heart-wrenching destruction of the 46,000-year-old sacred Indigenous Juukan Gorge.

Then came the floods, the resurgence of the Black Lives Matter movement, the Great Barrier Reef being at risk of becoming endangered, and a backwards step in the fight to close the gender pay gap. While this is feeling very doom and gloom, it also works as a catalyst for change.

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More than ever before, we’re having meaningful discussions about what is causing such extreme weather events and governments are announcing net zero emissions targets and their plans to transition to a green energy future. Discussions about flexible working arrangements and mental health are at an all-time high, and corporations are integrating more impactful policies to support diversity and inclusion.

People are using their voices for good. We believe that these profound changes have led to the realisation that sustainability is needed to protect not just our communities, but our economy and livelihoods. And our actions prove it.

For a long time, sustainable investing has largely been reserved for those of us who are more environmentally enthused or philanthropically inclined. There was a genuine belief that investing sustainably meant compromising on returns and therefore it wasn’t commonplace in the financial markets. We now know that is no longer the case.

We are experiencing firsthand how companies that prioritise sustainability are outperforming their peers. In conjunction, investors are pouring record amounts of money into sustainable funds. In Australia, total assets overseen by ethical investment funds leapt 30 per cent in 2020, accounting for 40 cents of every professionally managed dollar.

So, as more and more investors continue to make their mark by aligning their investments with their values, companies embracing sustainability are continuing to be rewarded for their efforts. We are starting to see this play out everywhere.

BHP has sold its oil and gas assets, carmakers are choosing to halt the manufacturing of internal combustible engines entirely, Woolworths has unwound from its alcohol and pokies business and ETF fund managers were threatening to sell biotech giant CSL’ shares because it was the only ASX 200 company not committed to climate change action.

It is our own collective influence that creates this force for change. Larry Fink, the CEO of investment manager Blackrock, summarises our thoughts: “It is clear that being connected to stakeholders – establishing trust with them and acting with purpose – enables a company to understand and respond to the changes happening in the world.

“Companies ignore stakeholders at their peril – companies that do not earn this trust will find it harder and harder to attract customers and talent, especially as young people increasingly expect companies to reflect their values…

So what makes a company sustainable?

We know by now that the finance world has a tendency to seem a little confusing, so it’s only natural that sustainable investing be no different. Because investing sustainably means investing in whatever aligns with your own personal values, there’s no clear cut measure that defines whether a company is a sustainable investment or not. It depends on your own preferences.

It’s important to understand that sustainable investing can occur along a spectrum. A great starting point is to understand Conscious Investment Management’s six approaches making up the ‘responsible investment spectrum’:

Negative impact investment: Investments that are destructive to society (e.g. the tobacco industry)

Greenwashing: Investments that claim positive social or environmental benefit but are not backed by true impact results (e.g. fast fashion labels producing an ‘environmentally friendly’ range)

Negative ESG screening: Excludes investments that negatively contribute to society and/or the environment (e.g. an ETF investing in Apple or PayPal, companies that have net-zero emission goals, but aren’t actively creating products or services that improve sustainability)

Positive ESG screening: Focus on investments that favour ESG factors (e.g. an ETF that invests in companies creating clean energy technology)

Impact investment: Investing with direct and intentional positive social or environmental impact with the acceptance of market-rate returns (e.g. constructing social housing)

Concessionary returns impact investing: Transformational impact, willing to accept below-average returns (e.g. buying an office building and providing it rent-free for charity).

How can I make sure my investments align with my values?

Many companies now produce annual sustainability reports, which can be a great place to start to get a feel for the company. But keep in mind that the companies will have written these reports themselves, so chances are they will be very focused on the good things and not so much on any bad. Yahoo Finance is another great resource, it has a ‘sustainability’ tab where you can get a good summary of what a company is doing.

Market Forces has an interesting comparison page for Australian banks and finally, the Responsible Investment Association Australasia has a responsible return website, where it looks at certifying products as responsible investments.

There is a lot of information out there that you can filter through, but as investors, we are fortunate to have the opportunity to make a difference with our money. As greater numbers of investors prioritise sustainability in their portfolios, the flow-on effect can be dramatic.

Companies that are slow to adapt are facing difficulties attracting investors, which can ultimately lead to businesses going bust without inflows of capital. And within industries, companies that embrace sustainability are performing better than their competitors as a result. We can each do our part by putting our money where our mouth is and playing a role in fostering this momentum.

This is our favourite part of investing. You get to contribute to a cause you care about or a trend that interests you, helping companies to grow and improve society, all while generating returns to build your own financial independence.

Wondering what’s next? If you’re someone with good money habits who’s over being told to stop buying avocados or ordering Uber Eats in order to get in control of your future finances, then You’re in Good Company is the podcast for you. Tune in every Tuesday on your favourite podcast platform.
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