Three approaches to sustainable investing

The three main approaches that an ESG-conscious investor can follow often overlap, says Hortense Bioy, director of passive strategies and sustainability research at Morningstar

Ruth Saldanha 21 March, 2019 | 5:00PM

 

 

Hortense Bioy: ESG, sustainable investing, responsible investing, ethical investing, are terms often used interchangeably to describe this space that is driving a lot of interest at the moment. And all these terms mean different things to different people. 

To simplify, at Morningstar we break it down into three approaches based on what investors believe in and want to do:

- Some people just want to exclude stocks that don’t reflect their personal values. So maybe they don’t want to invest in weapons or tobacco companies. So, they screen out these companies. Now investors who choose this approach need to be aware that exclusions purely on the basis of ethical criteria may potentially negatively affect their investment returns.

- For other people, sustainable investing means ESG integration. It is about using environmental, social and governance factors to mitigate risk and potentially generate alpha. So, the objective here is not ethical but financial. And this what an increasing number of asset managers are doing, and this is what is expected to become the new normal. So eventually, every professional investor will integrate sustainability in their investment decisions. 

And the third approach is thematic and impact: you want to make a difference. So alongside generating a good financial return, you also want to solve the world’s problems. So for example, you want to tackle climate change, finance energy transition, or improve people’s wellbeing. Impact investing is perhaps the most exciting but also the most challenging part of the sustainable investing space. 

So, these are the three main approaches that an ESG-conscious investor can follow. And as you can see, these three approaches can overlap.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca