Empowering every investor: bridging values and finance for a sustainable future

Investing beyond numbers: paving the path for a sustainable future

Gone are the days when investing was solely about maximizing profits. Today, it’s about making a meaningful impact, and therefore individual investors are increasingly seeking to align their financial goals with their personal values.

The attraction of Environmental, Social, and Governance (ESG) investing stems from two primary aspects. First, some individual investors prioritize their ethical values and social responsibility over maximizing profits. In other words, they are willing to forgo some profit to contribute to societal good. Second, profit-driven investors believe companies that focus on ESG responsibility are likely to be better managed and more adept at foreseeing and reducing risk, making them better potential long-term investment opportunities.

Struggles with Sustainability

While sustainable investing is gaining traction, many retail investors still do not consider ESG when making investment decisions. This is driven by several underlying factors, including lack of education about ESG, the appearance of limited investment options, accessibility and consistency in ESG data, and combatting short-termism, to name a few.

Lack of education

One of the most common hurdles in ESG stems from a lack of education—a lack of familiarity with and understanding of what investment options are available to them. For example, a study from owlesg.com points out that  46% of respondents stated that the main reason they don’t consider ESG investments is a lack of familiarity. This also study highlighted that nearly 28% of respondents didn’t know how to determine whether an investment was ESG-friendly, and just 15% noted performance concerns as a reason for not investing in ESG. 

This study highlights that retail investors need help understanding how to learn about and research ESG investments, not necessarily performance concerns.

Limited investment options

According to a study by the Wisdom Council, nearly six in ten retail investors are unaware that they can invest in a way that positively contributes to ESG, and four out of five surveyed believe they have a key role to play in protecting the environment.

Data accessibility and consistency

Another key hurdle for individual investors is the lack of easy access to ESG data through a single source. Instead, many companies publish “sustainability reports,” requiring investors to fumble through pages of jargon, often leaving them more confused than when they started.

To further highlight this point, according to frameworkESG.com, nearly 600 different ESG ratings are published globally, making it exceedingly difficult for investors to make sense of varying guidance and frameworks. 

Short-termism

Short-termism is characterized by a myopic focus on immediate financial gains at the expense of long-term sustainability and is another obstacle to sustainable investing. Many companies prioritize short-term profits to meet quarterly earnings targets, often neglecting long-term investments in sustainable practices. 

Investors can advocate for corporate accountability and encourage companies to adopt a more holistic approach that considers both financial performance and environmental stewardship; however, this is more commonly done from an institutional level.

In many cases, short-termism can be difficult but possible to combat. For example, a recent Harvard Business Review article points out that when Paul Polman became the CEO of Unilever, then an underperforming consumer goods giant, he immediately ended quarterly earnings guidance. Instead, became explicit about his commitment to a long-term strategy rather than focusing on short-term profits. 

That guidance led to an exodus of short-term-focused investors, thereby attracting more patient capital which is critical to sustainability efforts.

Empowering investors to make an impact

To make a difference, individual investors need to adopt a strategic approach that combines financial returns but also consider social and environmental impact. 

According to a study by the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Wealth Management, approximately 77% of individual investors worldwide are “interested in investing in companies financial returns while also considering positive social and/or environmental impact.” 

Studies show that investing in ESG companies does not affect returns. According to a study from Morningstar, it found no risk/reward trade-off to investing in ESG companies – in other words, retail investors do not have to compromise returns in exchange for building a portfolio of ESG companies.

So what does this all mean?

It is clear that investors are not concerned about sub-optimal returns with ESG investments and empirical data indicates the same. Instead, individual investors need to become more familiar with ESG. They don’t know how to make sense of the labyrinth of ESG rating methods, how to access and read them, and what ESG-friendly investment options are available. ESG investing has just become too complicated for many retail investors. 

Join ESG communities and events

To engage with fellow ESG enthusiasts and professionals, consider joining online and offline communities and events. These platforms provide valuable opportunities for networking, learning, and collaboration. Among the most active and diverse are:

• The ESG Investing Group on LinkedIn a community for ESG  investors to exchange news and perspectives.
• The ESG Circle on Meetup a local community where ESG enthusiasts can connect and socialize.

Familiarize yourself with ESG standards and ratings

To grasp ESG concepts, start by acquainting yourself with the various standards and ratings that assess and benchmark ESG performance across sectors, regions, and themes.

Among the most prevalent and reputable are:

• The Global Reporting Initiative (GRI)
• Sustainability Accounting Standards Board (SASB), 
• Task Force on Climate-related Financial Disclosures (TCFD), 
• UN Principles for Responsible Investment (PRI). These frameworks offer guidance, metrics, and leading practices for reporting and disclosing ESG data to diverse stakeholders.

Understand ESG investing approaches

Generally speaking, there are 3 common ESG investing approaches: Values-based, ESG Integration, and Impact Investing.  Retail investors must know these approaches compared to traditional investing.  

1. Values-based investing, or Socially Responsible Investing (SRI), is one of the most well-known ESG investing approaches. This approach involves avoiding investments in specific sectors or companies, like tobacco, firearms, or fossil fuels – colloquially known as ‘sin stocks.’ This strategy appeals to retail investors who want to avoid supporting businesses they may find objectionable.

Investors can easily get exposure to funds that avoid  ‘sin stocks.’ For example, VFTAX, Vanguard FTSE Social Index Fund,  is a mutual fund screened for specific environmental, social, and corporate governance (ESG) criteria. 

2. ESG integration is a more contemporary investment strategy pioneered by major investors like pension funds and endowments, but it can also be applied by individual investors. ESG integration strategies are usually more aligned with broad benchmarks, offering some exposure to economic sectors rather than entirely excluding specific sectors they may deem unacceptable. Put simply, these strategies do not avoid specific industries entirely; rather, they limit their investment exposure.

For investors just getting started in ESG investing, an ESG Integration approach may be the most practical to implement. 

3. Impact investing is a more direct approach that involves investing money to achieve a specific positive outcome. Examples include offering loans to low-income homebuyers, funding projects to cut factory air pollution, investing in carbon credits, or even buying shares in a company to influence its policies. 

While it may be difficult for individual investors to provide funding or influence a company’s policy directly, one example is Vanguard’s Bailie Gifford Global Positive Impact Stock Fund Investor Shares, VBPIX, which is an “actively managed fund that seeks to invest in global high-quality growth companies that can deliver positive change in one of four areas: Social Inclusion and Education, Environment and Resource Needs, Healthcare and Quality of Life, and addressing the needs of the world’s poorest populations.”

Bringing it all together

Empowering every investor to embrace sustainable investing requires addressing challenges related to transparency, data quality, regulatory compliance, and short-termism. By fostering a culture of accountability, promoting education, and providing accessible investment options, we can bridge the gap between values and finance, paving the way for a more sustainable future.

Read more: Why businesses need to up their commitment to the “S” in ESG