There’s been a lot of talk about sustainable investing recently. Many surveys of fund managers and investors — including this one from Morgan Stanley — show that interest in and enthusiasm for sustainable investing is at an all-time high. Meanwhile, some of the market’s biggest players are starting to make power moves in the sustainable investing space.
But, if you’re scratching your head at this term and its implications, you’re not alone.
What exactly is sustainable investing? Why does it matter? What should you do about it? Given how big sustainable investing is getting today, these are all important questions that investors should be asking.
Fortunately, I’ve done the leg work for you, and have attempted to answer these questions at high level. Without further ado, then, let’s dive into a discussion on sustainable investing.
What Is Sustainable Investing?
From a pure definition perspective, sustainable investing considers not only financial return, but also environmental, social, and governance (ESG) impacts.
The idea sounds simple enough, right? When investing, don’t just be worried about making money. Be concerned about the well-being of society and the environment, too. But the interesting wrinkle comes from this idea that it is actually on the shoulders of investors, rather than governments, to drive positive ESG changes.
“[F]or-profit impact investing is significant because it leverages the powerful forces of capitalism to address challenges at a scale that governments and nonprofits can’t match,” notes Leslie Crutchfield, executive director of Georgetown University’s Business for Impact. “Consider that the total economic activity of corporations ($23.1 trillion) dwarfs that of government ($3.1 trillion) and of the nonprofit sector ($1.2 trillion).”
Broadly, then, sustainable investing isn’t just a “nice” thing to do to drive positive ESG change. It’s a necessary thing to do. And, it’s only possible if we all play a part, because one investor can only exert so much pressure alone, while a group of investors can exert much more pressure to drive positive ESG change.
Why Does It Matter?
Sustainable investing matters here and now because it is finally moving into the mainstream spotlight, and will only gain more and more mainstream traction over the next decade.
Most notably, BlackRock — the world’s largest asset manager with a whopping $7 trillion in assets under management — recently outlined some serious changes they would be making to become more sustainable investors.
First, BlackRock is demanding greater disclosure from all firms with respect to their carbon emissions. Second, they are doubling their number of sustainable fund offerings. Third, they are dumping stock in firms that earn more than a quarter of their revenues from thermal coal.
Those are big changes from the world’s biggest financial player, and the changes are just starting.
“Many fund managers will follow BlackRock’s lead on divestment from thermal coal,” says Crutchfield. “[B]ecause its sphere of influence is so vast and its investments products are so interconnected with those of other investors … this will have a ripple effect across other firms.”
Crutchfield also notices that demographic trends are in favor of sustainable investing going mainstream.
“Nearly 9 out of 10 Millennials look exclusively for impact investment opportunities, whereas only about half of Gen X investors and a quarter of Baby Boomers say the same,” notes Crutchfield. And $24 trillion of wealth will transfer from Boomers to Millennials over the next decade or so.
As it does, Crutchfield thinks that “the vast majority of that capital will be seeking deals with social and environmental returns, not just financial.”
What Should You Do About It?
Given that sustainable investing is a very real trend that is gaining very real traction and will only become more and more important over the next several years, retail investors should probably do something about it, and soon.
Start adopting the sustainable investor mindset, start considering the ESG impacts of your investments, and start buying stock in positive ESG companies.
I say this for a few reasons. First, institutional investors are clearly changing their ways, and they are the biggest players in the market, so buying pressure from these big players will push up stocks that align with the sustainable investor mindset.
Second, retail investors are also adopting sustainable investing. That will provide further upward pressure on these stocks.
Third, beyond the stock market, young consumers are increasingly consuming and purchasing things with an ESG mindset, so those companies are winning over the lion’s share of Millennial spend.
Last, but most important, it’s the right thing to do.
Bottom Line on Sustainable Investing
Like it or not, sustainable investing is the future of investing. This pivot from a traditional mindset is just starting today, with some of the market’s biggest players enacting real change. This is just the tip of the iceberg. Over the next several years, many more real and significant changes will materialize, the sum of which will make sustainable investing the norm.
Smart investors will stay ahead of this trend and start adopting this mindset before everyone else does.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.