Sustainable investments focus on companies that incorporate ESG (environmental, social and corporate governance) criteria into their long-term strategies. Over the last few years, sustainable investments have seen explosive growth, and Wall Street has jumped on the bandwagon by creating sustainable-investing divisions that develop products geared towards investors who are looking to align their core values with their investments.
While sustainable investing is certainly intriguing, like any other investing style, it does have some pitfalls.
The Definition of “Sustainable” Varies
One of the biggest issues with sustainable investments is that there is a lack of uniform information for institutional and individual investors. Essentially, the term “sustainable” will vary greatly from one person to the next. This can make it difficult for investors to make a decision on which funds to dedicate their money to.
The good news is that efforts are being made to develop uniform standards for this investment style. Jean Rogers, founder of Sustainability Accounting Standards Board, is attempting to create a uniform set of standards that would apply to 80 industries across 10 different sectors.
Rogers notes that the current data that surround sustainability relies far too much on voluntary corporate disclosures, which may include company questionnaires created by institutional investors (questions vary greatly from one company to the next) and annual stability reports.
For the individual investor, it can be a challenge to find accurate information on sustainability in a simple and reliable way.
Sustainable Investing Is Harder Than It Looks
While, in theory, sustainable investing is simple enough, this investment style is much harder than it looks. For this reason, many individual investors are leaving it to the experts rather than doing the work themselves.
Currently, there are a few popular funds that leave all the decision-making to the experts. PGRNX (Pax World Global Environmental Markets Fund) is one such index. Firms such as Impax Asset Management, which has been in the business for 17 years, have helped create guidelines for the fund.
At first, Impax’s strategy focused on excluding certain sectors, like tobacco, alcohol and firearms. Its strategy evolved over time to focus on water, energy, food and agriculture and the resources themselves.
Technology Relies on Cloudy Data
New startups are aiming their focus on creating automated money-management platforms for sustainable investing. Platforms choose investments based on a person’s answers to a variety of questions about investment preferences.
While convenient, these features rely on cloudy data. Investors also need to be cautious of platforms that appear to be “too good to be true.”
Sustainable investing can be a smart choice, but like with any other investment thesis, the key to success is effort and due diligence.