To a growing number of us fortunate enough to be investors, “good money” means investing not only for profit, but also for people and planet.
Sustainable investing is an umbrella term that refers to investment strategies that seek competitive risk-adjusted returns alongside positive environmental, social and governance (ESG) outcomes. In so doing, it supports the transition to a more sustainable version of capitalism, which is focused on creating value for all stakeholders, rather than a focus solely on shareholder primacy.
Investors integrate ESG information to give them a broader perspective on a company than they get using financial metrics alone. That provides greater insight for investment decisions. In turn, this investor focus on ESG sends a signal to companies that investors believe it is important for them to address ESG issues that are material to their business.
Other stakeholders are sending the same signal to companies. Increasingly, customers and clients want to purchase sustainable products and services. Employees are becoming more vocal about ESG issues as well, because they want to work for companies they believe in. In the 21st century information environment, all of these stakeholders, investors included, have more access to information about a company’s activities, impact, and public stances than ever before.
As a result, stakeholder expectations of corporations have increased. With more customers, clients, employees, and investors aligned around the concept of sustainability, no company today wants to be considered an ESG laggard. And many others aspire to be sustainability leaders because they believe they will be rewarded with greater customer loyalty, a more-dedicated and productive workforce, and diverse leadership making better decisions. Sustainability is increasingly seen as an ingredient for business success in the 21st century.
It’s not the only thing driving business success, of course, and sustainable investors typically do not base their decisions solely on ESG factors. These factors are part of an overall mosaic that informs investment decisions. But the existence of ESG metrics and the growth in the number of investors using them have already changed the way many companies operate and plan to operate going forward. That’s how using ESG in the investment process is helping drive positive outcomes not only for companies, but for people and planet.
Jon Hale is global head of sustainability research for Morningstar Sustainalytics