Sustainable investing has experienced increased interest over the past few years, with a sharp acceleration in 2020 due to the COVID-19 pandemic and other high profile social issues, such as the Black Lives Matter movement. There are, however, some common myths and misconceptions among investors that may be new to modern sustainable investing approaches. This educational resource attempts to provide insight and clarification into what we believe are the most misunderstood issues.
Myth #1: Sustainable investing is the same as ethical investing
While modern sustainable investing approaches have their roots in ethical investment strategies, there are important differences. Traditional ethical investing (also known as socially responsible investing, or SRI) is just one approach to sustainable investing, and typically involves strategies that prohibit investments in companies involved in certain industries that are considered unethical. Some of the more common areas of involvement include tobacco, firearms, controversial weapons, adult entertainment, and gambling, however, there are many others. These areas of involvement are highly subjective in nature, since different individuals will have different views of what they personally believe are “wrong”. Additionally, these exclusions may not involve factors that are financially material (particularly in those legacy strategies) and tend to focus only on social issues.
On the other hand, many modern sustainable investing approaches focus on financially material environmental, social, and governance (ESG) factors. Since they account for the materiality (or economic impact) of these ESG factors, they are typically less subjective than traditional SRI approaches. Advancements in reporting standards over the past few years and increasing investor demand for better ESG transparency has facilitated this shift in focus towards materiality. Lastly, the incorporation of material ESG factors into the investment process may not only help to identify material ESG related risks, but also uncover material ESG related opportunities. Modern sustainable investment approaches are where economic value intersects with society’s values (to varying degrees depending on the approach).
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This article reflects the views of Empire Life as of the date published. The information in this article is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance on or misuse or omissions of the information contained in this document. Please seek professional advice before making any decisions.