What is Sustainable Investing by Portfolio Management? | Invest
Climate change is real, and the global response to this phenomenon is transforming a variety of different industries. But if you’re an investor who cares about the future, how can you be sure you’re investing your money in assets that are part of the climate change solution, rather than “dirty” companies that are at odds with your values to match? ?
Also, even if you can have confidence in a sustainable investment strategy, how can you make sure you don’t settle for an inferior retirement plan?
As with so many things on Wall Street, the answers to these questions are complicated and depend in part on your personal financial goals. But the good news is that with a little homework, it’s possible to get started effectively with portfolio management for sustainable investing.
- What is sustainable finance?
- What are the most important sustainable finance metrics?
- What are ESG ratings?
- What is greenwashing?
What is sustainable finance?
The dangers of putting profits above everything else should be clear to everyone. From real-life scandals like Bernie Madoff and the collapse of Enron to fictional villains like Gordon Gecko, who famously quipped “greed is good” in the movie Wall Street, there’s no shortage of cautionary tales about capitalism’s rampage.
Sustainable finance is the catch-all term that refers to a different mindset. It includes assessing the environmental and social impact of financial decisions. A focus on sustainable finance can be done in a number of ways, but from an investment perspective, it generally means investing your capital in companies that you see as part of the solution – or at least not part of the problem.
In the first camp, being part of the solution, the most common sustainable finance strategies for investors include “inclusive” indices that identify leaders in specific areas. For example, the $5 billion iShares Global Clean Energy ETF (ticker: ICLN) is an exchange-traded fund, or ETF, that requires a certain percentage of a company’s revenue to come from sustainable energy businesses. The portfolio of around 100 stocks includes solar companies such as Enphase Energy Inc. (ENPH) and wind turbine companies such as Vestas Wind Systems AS (VWDRY).
On the other hand, it still makes sense to identify companies that may not be innovative but just aren’t making things worse. This is exemplified by “exclusionary” funds, most commonly excluding things like firearms companies, coal mines, or companies involved in Arctic oil and gas exploration. The iShares ESG Aware MSCI USA ETF (ESGU) is the gold standard of this group, with $20 billion under management. However, the portfolio does not appear to be as sustainability-focused as the previous fund, including iPhone maker Apple Inc. (AAPL), e-commerce giant Amazon.com Inc. (AMZN) and insurance company UnitedHealthGroup Inc. (UNH ). top stocks. However, these companies are on the list for what they don’t do. They don’t sell guns and they don’t produce “dirty” fossil fuels.
What are the most important sustainable finance metrics?
What complicates portfolio management for sustainable investing is that there are dozens of other funds alongside these two leading iShares investments. And unfortunately, there is no “right” way to measure sustainability – or lack thereof – with a commonly accepted measurement system.
That said, it’s up to individual investors to decide which approach fits best.
If you’re interested in clean energy, the aforementioned iShares Global Clean Energy ETF might be a superficial fit. But if you pop the hood and check out the full list of the 100 stocks in this ETF, you’ll also find publicly traded utilities like Consolidated Edison Inc. (ED), which generate a decent percentage of energy from traditional and renewable sources.
Is this really the kind of investment you wanted to count on? If not, you may need to find an alternative investment vehicle.
If you’re more into alternative energy, perhaps consider a solar ETF like the Invesco Solar ETF (TAN) instead. There’s admittedly more volatility in a fund like this because it’s focused on solar technology. But with holdings like Enphase Energy, First Solar Inc. (FSLR), and SolarEdge Technologies Inc. (SEDG), you can rest assured that fossil fuels aren’t sneaking in through the back door.
Or maybe you are interested in electric vehicles, both because of the environmental friendliness of these products and because of the megatrend that could lead to big profits. In that case, the Global X Lithium & Battery Technology ETF (LIT) might be worth considering. This $4 billion Global X ETF is designed to play battery technology and the infrastructure that goes with it. This includes the Powerwall integrated battery system offered by Tesla Inc. (TSLA), which provides backup protection as well as power when the sun (or the grid) goes down.
Each of these options offers a different approach. And deciding which is best is entirely up to you, your investment goals, and the type of sustainability you’re looking for.
There is a lot of flexibility in the exchange traded fund market for sustainable investment strategies. But that’s both a blessing and a curse, as it forces investors to think twice about what they’re buying.
What are ESG ratings?
However, the move towards sustainable financing is not just about financing green energy companies. It also includes a general business approach that recognizes key issues for businesses in all sectors.
For example, chipmaker Intel Corp. (INTC) announced plans to achieve net-zero greenhouse gas emissions from its global operations by 2040. The manufacturing industry can be very carbon intensive, so this corporate strategy would make INTC look better than some of its peers.
For investors, however, not only environmental initiatives are important. There are many companies where women and minorities are underrepresented in senior management. Eyeing the S in ESG, it may be worth prioritizing companies like General Motors Co. (GM) and Citigroup Inc. (C) over their peers. Both have a higher proportion of women in senior management than their peers and Wall Street firms in general.
And then there is corporate governance. Believe it or not, many public companies are not very accountable to their shareholders, either thanks to a large group of insider owners or a dual share structure that deprives common shareholders of voting rights. Facebook parent Meta Platforms Inc. (META) is a prime example, where founder Mark Zuckerberg owns more than half of the company’s voting shares — meaning he can almost unilaterally do as he sees fit.
There is a growing movement on Wall Street to measure every part of the ESG picture and rank companies accordingly so investors can make informed decisions. Unfortunately, there is no universally accepted measure of what the right rating system is, let alone what a “good” rating is for a business.
That in turn means it’s up to investors to learn more for themselves.
But here’s the good news: there are many companies out there working hard to refine the system. And whether you prefer Bloomberg’s ESG Ratings, or FTSE Russell’s ESG Ratings, or S&P Global’s ESG Scores as your index of choice, it doesn’t matter much as long as you understand what data these indices use to base their rankings on create.
It takes work, sure. But finding this information is easier than ever — and if you’re serious about sustainable investing, then this evolving field is worth familiarizing yourself with.
What is greenwashing?
While there are tons of sustainable financial investments out there and a wealth of information for interested investors, there is also a risk of disinformation. This most commonly takes the form of “greenwashing” — or an organization’s practice of marketing itself as environmentally friendly, rather than actually doing the hard work necessary to address genuine sustainability concerns.
In fact, financial regulators are increasingly concerned with cracking down on this practice in the financial markets. For evidence, consider a May 2022 case against BNY Mellon Investment Adviser, in which the company “implied in various statements that all investments in the funds were ESG quality checked, although this was not always the case.” The company agreed to pay a $1.5 million penalty.
As previously mentioned, there is no universal rating system or disclosure process to reach a consensus on whether an investment is “green” or not. So perhaps it’s not surprising that some companies are simply greenwashing or using their own sustainability lite standards to simply label something with an ESG, regardless of its real-world impact.
There are actually worthwhile key figures for interested investors. However, the existence of greenwashing makes it necessary for anyone interested in sustainable investment portfolio management to be informed about what they are buying and what ESG ratings apply to the investments in question.