How Sustainable Investing Aims to Make a Difference
By Rebecca Scaife
Published on: March 8, 2023
Sustainable investment funds employ three key strategies. These strategies are inter-related and underpin our sustainable investment philosophy at Everlake.
In its simplest form, sustainable investing attempts to enact change in three main ways:
- Avoid & Exclude
- Engage & Improve
- Positive Impact
Avoid & Exclude
Fund Managers use a comprehensive list of exclusion criteria that avoid damaging or unsustainable products and business practices. This approach actively seeks to exclude certain stocks. This was the original mark of sustainable investment funds, with usage dating back to the 18th century. Negative screening for so called ‘sin stocks’ like fossil fuels, armaments, gambling and tobacco is still employed today as a first sweep through when selecting stocks.
Engage & Improve
In addition to being more committed shareholders, sustainable investment funds tend to engage directly with companies to achieve positive social change. Being part of an investment fund means being part of a larger collective voice. Government, customers, boards, management, and employees can collectively exercise significant influence on the sustainability of any company.
In seeking to invest sustainably, a fund manager can exercise their mandate by:
- excluding certain companies from their funds
- engaging with boards and management to improve their sustainability performance
- investing in sustainability focused companies.
Recent examples of this include:
- The Norwegian Sovereign Wealth fund is approximately $1.3trn in size and owns circa 1.5% of every listed company. In December 2022, it announced plans to vote against certain companies. These were organisations that fail to set a net zero emissions target, overpay their top leaders, or do not have sufficiently diverse boards.
- In March of 2022, 53% of Apple shareholders backed a motion for the company to undertake an independent assessment of its adverse impacts to civil rights. This motion was filed by firms involved in Sustainable Investing and, due to its campaign, received the backing of large investment firms such as Blackrock and Citigroup.
Shareholder action is therefore becoming an increasingly loud voice in the investing world and is becoming harder for companies to ignore.
As a result, many companies are now embracing lobby and interest groups as they view ongoing active dialogue. These groups provide them with insights into investors’ expectations of corporate behaviour. Indeed, research by Dimson, Karakas and Li (2015) shows that successful engagement between companies and shareholders results in increased returns to shareholders.
Positive Impact
This strategy seeks to reward organisations. Specifically, those that are making direct positive differences to the world, such as renewable energy companies. Fund managers invest in companies that are forward looking, provide sustainable solutions, or are have a favourable impact on the environment or society.
Learn more about Sustainable Investing Download Our Guide
