Crash Course On Sustainable Investing

I need some guidance. I’m a sophomore focusing my studies on environmental sustainability. In one of my courses, the instructor has a different student present a topic each week that she assigns the week prior. The topics are always related to sustainability, but they’re usually indirectly related to the environment. For example, a few weeks ago, my friend had to present conservation policy. She decided to explain the importance and implications of the Kyoto Protocol when it comes to curbing global climate change. This coming week is my turn to present, and I’ve been assigned to introduce sustainable investing to my classmates. I’m no math expert and know almost nothing about investment strategy. How should I define sustainable investing compared to normal approaches? How can I make it interesting?

Sustainable investing isn’t necessarily a dull topic simply because it’s related to financial investment strategy. More importantly, you most definitely don’t need to be a math expert to grasp investment strategy. You might begin by assuming that some of your classmates are equally as ignorant when it comes to investing money, which means you should define it and contrast it with saving money. This is crucial, because while they’re superficially quite similar, there’s considerable difference to appreciate between saving and investing.

Once you have everyone on the same page with what investing is and what it isn’t, you can introduce the idea of trading strategy. One author at the Wall Street Journal likens investing to the capitalist casino, but that’s not really the case. There’s very little strategy involved with gambling, whereas people ostensibly rely on strategy when it comes to investing. That being said, researchers using computer simulations now suggest that a random investment strategy might be as successful as those already taught and utilized. That’s something investors can decide for themselves.

Presenting sustainable investing should be simple enough, because it adds another dynamic to what’s often exclusively about generating long-term positive returns. Sustainable investing is a categorical approach that encompasses socially responsible investing (SRI) and environmental, social, and governance (ESG) investing. These strategies take separate factors into consideration when crafting an investment portfolio. For instance, socially responsible investing would have you rely on negative screens to omit certain stock options involved in “sin” industries (i.e., tobacco, alcohol, firearms, etc.).

It’s worth noting that while such an approach would certainly make moral and ethical sense, opponents argue that it inherently undermines portfolio performance because all stock options must be considered in order to achieve optimal outcomes. That’s why ESG investing has become much more popular. ESG is more nuanced and takes into account the fact that a stock option linked to a “sin” industry might still produce positive outcomes for society. For instance, a brewer might reinvest some proportion of its revenues to social assistance. In those cases, eliminating that stock option might not have the impact expected, especially at scale.

Investment strategies tend to be as varied as the investors using them. Sustainable investing is an intuitive next step in a globalized world that’s seeing how widespread the consequences of industrial activities can be. These types of formalized investment strategies enable vested stakeholders to support businesses that are beginning to realize that “doing right” has a huge benefit for their bottom line. In other words, investors can do right and do well at the same time.

“Successful people have a social responsibility to make the world a better place and not just take from it.” -- Carrie Underwood