While sustainable investing may seem like a modern term, the history of responsible investing actually goes back many years. As people recognize how their actions impact the world around them, more investors (therefore more banks, funds, and other financial institutions) are demanding that their money be invested in sustainable, progressive causes that do good for the world while also doing good for their portfolios.
Socially Conscious Banking: What is Sustainable Investing?
In today’s globalized world, international supply chains, financing, and consumer markets are increasingly intertwined. And our day-to-day actions and financial choices have a growing impact.
Every dollar that you invest directly and indirectly supports businesses, financial institutions, and the causes these corporations support. Alarmed by inequality, environmental degradation, and other issues, a growing number of consumers and investors are using their investments to demand that banks and businesses take action to help solve the world’s more prominent challenges.
Recent examples include:
- Investors and stakeholders pushing Harvard to publicly disclose and change the holdings it has in funds that use prison labor.
- Pressure on the world’s largest financial organizations to stop lending and investing within the tobacco industry.
- A push for investors to stop investing in factory farming due to the ethics of animal suffering and the potential environmental degradation connected to some agricultural practices.
But it’s not just about boycotting or avoiding banks and funds that invest in allegedly unethical or unsustainable practices. It’s also about purposefully supporting sustainable investments and ethical banking. For many investors, it involves putting your money where your mouth is. And having your portfolio reflect the values and goals you espouse.
Sustainable investing typically includes investments that take into consideration environmental, social, and governance (ESG) factors:
- Environmental factors: How does a company help take care of the environment or not contribute to ongoing environmental destruction?
- Social factors: How do a company’s actions impact its employees, supply chain, and the communities in which it conducts its business?
- Governance: How does the company help ensure transparency and progress in running, including issues such as gender equality and equal pay?
The History and Growth of Sustainable Investing
According to the International Institute for Sustainable Development, the value of sustainable investments hit $30.7 trillion in 2019. That’s an increase of 68 percent since 2014 and represents historic highs in the financial sector.
The IISD notes that this growth’s biggest drivers have included millennial investors who want their investments to reflect their values and banks and funds under increased pressure from investors. For example, one study found that 31 percent of millennial investors take environmental, social, or governance factors into account when choosing how they invest.
While 2020 saw sustainable funds break their historic records and attract record levels of money, sustainable trends and ESG investing is hardly new.
According to the Trade Union Government and Administration in Great Britain, written by B.C. Roberts and published by Harvard University Press in the 1950s, trade unions’ pension funds were some of the earliest examples of sustainable investing. In the mid-1900s, these unions wanted to invest their money in progressive causes, such as hospitals, health services, and affordable housing.
More recent examples of selective, progressive investments include U.S. companies disinvesting from companies that supported South Africa’s apartheid in the early 1990s and investors moving away from investing in Canada’s oil sands instead of putting their money into the growth of sustainable energy. And the momentum does not appear to be slowing down anytime soon.
Sustainability’s Role in the Investment Process
In an effort to ensure transparency about sustainable investments, the industry has seen a growth in third-party rating agencies that assess sustainability’s role in the investment process.
Prominent examples include assessments by BlackRock, State Street Global Advisors (SSGA), and Fidelity Investments.
These agencies look at how ESG criteria affect business models, risk management, and asset allocation. For instance, financial experts Frédéric Samama, Mats Andersson, and Patrick Bolton created an investing model to manage climate risk. In this strategy, portfolios consisted of companies that kept their carbon footprint 50 percent lower than industry benchmarks and were 50 percent less involved in underperforming or outdated fossil fuel assets.
Thousands of financial institutions and investment firms have signed onto the internationally-recognized Principles for Responsible Investment, in which sustainability plays a role in the investment process through:
- Positive selection: More money is allocated to high-performing, ESG-compliant businesses, and corporations.
- Activism and engagement: Shareholders engage in constructive conversations and create positive pressure (often through shareholder votes) to encourage companies to support (or stop supporting) specific social issues.
- Exclusion: Companies that fail to meet ESG criteria are removed from pension funds, mutual funds, etc.
- Integration: Beyond just the bottom line, analysts’ summaries include ESG reports, as well as the challenges and opportunities related to ESG.
Speaking of the bottom line, the good news is that sustainable investing (and even divestment) may look different from what you’re traditionally used to, but the returns can be remarkable. Diversyfund points to LEGO’s example, which severed its relationship with Shell Oil to instead invest in social initiatives like environmental protection and making itself 100 percent reliant on renewable energy. Since its divestment from oil production in 2014, the toy manufacturer saw some of its biggest profit and growth in its entire history.
Aspiration: Sustainable Cash Management Services
If you are just starting to learn how to invest in sustainability, navigating the complex world of sustainable funds, investment banking sustainability, and social and corporate governance can feel overwhelming.
While you can take environmental, social, and governance factors into account on your own, a faster way to embrace responsible banking principles may be to work with a trusted ESG-focused partner like Aspiration.
All of Aspiration’s financial services and investments are socially conscious. The company pledges to take ESG into consideration, including a promise never to use your deposits to support coal mines, oil drilling, or the construction of pipelines. Plus, for every dollar you invest with Aspiration, the financial institution donates 10 percent to American charities.
Aspiration’s financial services include socially progressive savings accounts, as well as a socially-progressive high-interest savings account. Aspiration’s motto is “do well, do good”. If you’re looking for sustainable cash management services that help you protect your financial security while also protecting the planet and our communities, get started with Aspiration today.