Volatility is not an ultimate evil. It is a natural and integral part of financial markets and is not inherently negative. In fact, for those who invest in stocks, volatility can even be helpful, as it presents both opportunities and risks for investors. Although there is no surefire way to avoid volatility, an increasing number of investors are turning to sustainable investing.
Sustainable investing, or socially responsible investing, is an investment approach that seeks to generate the highest returns while also having a positive impact on environmental, social, and governance factors. Sustainable investing takes into account not only the potential for financial gain but also the ethical, social, and environmental consequences of investments.
Key aspects of sustainable investing include environmental, social, and governance considerations. Environmental considerations include evaluating factors such as a company’s carbon footprint, energy efficiency, use of natural resources, waste management, and efforts to address climate change and sustainability. Social considerations (S) assess how a company manages its relationships with employees, customers, suppliers, communities, and other stakeholders. It includes labor practices, diversity and inclusion, human rights, community engagement, and product safety issues. Governance Considerations (G) evaluate the quality of a company’s leadership, management, and corporate governance practices. If we combine them, we get ESG integration, which represents the three main pillars on which sustainable investing relies.
Generally, sustainable investing can take various forms, including:
Negative Screening. Avoiding investments in industries that do not align with certain ethical or ESG criteria. For example, excluding companies involved in tobacco, weapons, or fossil fuels.
Positive Screening. Actively seeking investments in companies exhibiting strong ESG performance or contributing to positive societal or environmental outcomes.
Impact Investing. Making investments with the explicit goal of generating measurable positive social or environmental impact alongside financial returns. Impact investments are often made in sectors such as renewable energy, affordable housing, or healthcare in underserved communities.
Shareholder Advocacy. Engaging with companies as shareholders to encourage better ESG practices, transparency, and accountability. Shareholder advocacy involves voting on ESG-related resolutions and dialogues with company management.
Altogether, sustainable investing has gained popularity as investors increasingly recognize the importance of responsible and ethical investing. However, there is no guarantee that sustainable investments will outperform traditional investments, and be aware that you may receive higher fees for sustainable investments.