The market has seen an increased number of consumers wanting to invest their money into companies that align with their values, and investors are choosing to invest in solutions that incorporate Environmental, Social and Governance (ESG) factors. There is also a growing desire for Sustainable, Responsible and Impact investing (SRI) solutions. It is not only pension funds and large institutional investors driving this increase; retail investors are also putting assets into the SRI sector.
What is ESG and SRI?
ESG refers to the three factors that measure the sustainability and ethical impact of an investment in a company. These factors are subsets of non-financial performance indicators that include carbon footprint, diversity in the workplace and donations to charities. The SRI sector is composed of companies that fall into six categories: clean energy, energy efficiency, clean technology, sustainable agriculture, transportation, and water.
Is there a performance penalty when going with ESG factors or SRI investments?
SRI investing combines the objectives of seeking positive returns and addressing global social challenges. There has been a notion that investing in ESG factors meant a sacrifice in returns, which is not the case. A study by Sebastian Rather in 2013, found that 72% of SRI funds do not show any significant performance difference when compared to their competitors; otherwise, the SRI funds outperformed almost as often as underperforming. There is an energy transition underway currently, as people move from fossil-based energy to renewable energy. Companies with greater gender diversity in senior leadership have experienced stronger performance and profitability. Looking at ESG factors and SRI investments as an addition to your portfolio, based on research, may tend to perform better financially in the long term.
Sustainable investing was once thought that investing your money based on your moral and personal beliefs would hinder your returns; this is no longer the case, as investment firms are starting to notice the long-term growth and success of these companies. Look at starting to add these factors in your portfolio to diversify your investments further and have the peace of mind knowing that you are investing in companies that you can be proud of.