Sustainable investing is becoming more popular as evidence mounts that this investment approach can offer a higher return. But what exactly is sustainable investing?
- Excluding harmful activities
- Reducing investment risk
- Engaging for a better world
Sustainable investing covers all sorts of investment approaches that apply environmental, social and governance (ESG) selection criteria. In its simplest form, investors opt to not buy shares in companies that engage in harmful activities such as weapons manufacturing, gambling, coal and tobacco.
In implementing such an exclusion policy, some investors not only exclude companies that operate in harmful sectors, but also companies with low scores on the ESG criteria.
The advantage of exclusions when investing sustainably
Despite limiting the investment choices, an exclusion policy often delivers a slightly higher return in practice.1 The reason is that investors avoid companies with a relatively high risk of setbacks, including damaging environmental, social and governance scandals.
One example of such a scandal is the emissions affair at Volkswagen. In the autumn of 2015, the German car manufacturer lost more than 30% of its market value within a week after news broke that it had manipulated software that measures greenhouse gas emissions.
Let your voice be heard
The disadvantage of excluding companies a priori is that you pass up the opportunity to engage with them and see whether they are willing to adopt a more sustainable policy. Huge gains can still be made in this way: the 100 most polluting companies account for more than 70% of global carbon emissions.2
If we manage to get some of these companies to save more energy, you can achieve a lot more with sustainable investing than through cycling to the office more often or separating domestic waste. BNP Paribas Asset Management makes its voice heard at about 1 500 shareholder meetings every year and meets dozens of companies to discuss sustainability.
Tackling sustainability bottlenecks
For some investors, the bar cannot be set high enough. They only want to invest in companies with extremely high ESG scores. One variant involves investing in companies that make a difference in addressing global challenges such as climate change, poverty and famine. This is known as impact investing.
Investments focus on such issues as water and food availability. Examples are innovations for solving water scarcity and the construction of a sustainable food chain. With impact investing, you make a measurable positive contribution to our world and can simultaneously profit financially.
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