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The broad term “sustainable investing” includes any investing that uses factors other than a profit-and-loss sheet, especially environmental concerns, social responsibility, and considerations of corporate governance. Because of those three broad headings, sustainable investing is also sometimes known as “ESG” investing.
It has been the millennial generation, the Americans born between 1981 and 2001, who have spurred the growth of sustainability as an investment trend. Investors contributed less than $5 billion to sustainable funds in 2015 but, with the increasing impact of millennials, that number rose to $51.1 billion in 2020.
ESG issues include, for example, the amount of carbon emitted into the atmosphere as a consequence of a business’ production system (E), whether the issuer’s management abstains from the kind of labor practices that provoke strikes or consumer boycotts (S), and whether a company has independent directors on its board (G). Surrounding all of these like a halo there is the question of disclosure: whether a company is open enough in its books and records so that actual and potential investors can keep track of how well it is doing in those three fields.
Can the Companies Keep It Up?
Together developments in these three fields, properly disclosed, tell investors of any generation if a company is acting in a way that it can long sustain. Hence the term “sustainable investing.”
For example: in January 2020, Larry Fink, the chairman and CEO of BlackRock, made the case that climate change, and accordingly the issue of carbon emissions, had become “a defining factor in companies’ long-term prospects.”
Managers of companies in which BlackRock has a stake ought to bring that corporation’s operations in line with sustainability Accounting Standards Board (SASB), and those of the Task Force on Climate-related Financial Disclosures, (TCFD) Fink said, or BlackRock — which manages $9 trillion in assets — “will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress of sustainability-related disclosures and business practices and plans underlying them.”
Is There a Sacrifice in Sustainable Investing?
One often debated question is: does sustainable investing come at a sacrifice in terms of dollars and cents? And, if so, how much of a sacrifice is that? Debate on this may be traced back to long before the millennials were conceived.
Many have argued that there need be no sacrifice with sustainable investing: they say looking at these factors actually benefits the bottom line.
But there are skeptics. Among them, Aswath Damodaran, professor of finance at Stern School of Business, New York University, and blogger.
Damodaran maintains that the empirical evidence that “investors can generate positive excess returns with ESG-focused investing” is weak. Even on the most favorable view of it, there is only correlation rather than causation. There is a weak though positive correlation between investing with ESG filters and doing well. But that might simply mean that people or institutions that have the skills necessary to invest profitably also are inclined to use such filters, not that the filtering is helping them make money.
Larry Fink, after all, had established his bona fides as a savvy investor long before he wrote the letter quoted above.
Beware of Greenwashing
If you, as an investor, want to invest only in companies that are working to lower their carbon emissions that, of course, is your right, whether or not you profit.
In that case, though, you should beware of what has become known as “greenwashing,” the desire of some companies to trick you into investing by offering misleading information, often with impressive though out-of-context specifics. (As a simple example, a company can lower its own carbon emissions by contracting out some of the high emissions work to a spinoff.)
There are, however, good sustainability indices on the market that can help an investor sort through these matters. If you are willing to do some research, you can align your investments with your conscience.