Many investors today go beyond financial measures like projected return on investment when evaluating opportunities. Sometimes far beyond. They’re driving a boom in sustainable investing, or investing focused on companies and funds with low existing environmental impact or innovative solutions to high-carbon, high-pollution industrial or commercial processes.
You don’t have to be a financial professional to grasp the value of sustainable investing. However, if you’re not a professional investor or don’t have much of your own money to invest in worthy causes, it feels a little abstract. A clear understanding of what we mean by “sustainable investing,” and of its impacts on the economy and planet, could help.
What Is Sustainable Investing, Anyway?
“Sustainable investing” usually refers to environmentally conscious investing. When evaluating potential investments in companies or funds, sustainable investors consider environmental impact factors such as carbon emissions, water pollution, and deforestation alongside more traditional measures of financial health and corporate governance.
Who Does Sustainable Investing?
If you have capital and you’re motivated to make investments with low or net-positive environmental impact, you can be a sustainable investor. Many retail investors, or individuals and families without millions of dollars to invest, consider themselves sustainable investors.
Some institutional investors follow sustainable investing principles as well. Investment fund managers like William Lundsford’s GuideStone construct sustainable portfolios that exclude fossil fuels and other high-impact industries, while private equity firms like Cyrus Nikou’s Atar Capital make direct investments in privately held companies working toward sustainable solutions. Sustainable investing is a big tent.
Sustainable investing is closely related to sustainable finance. Usually, “investing” implies equity investing, where the investor takes an ownership stake in a company or fund. Sustainable finance generally refers to debt investments in low-impact companies, which work differently than equity investments. Both focus on the same companies and opportunities, though, so the impacts are similar.
Is Sustainable Investing ESG Investing?
The term “sustainable investing” sometimes refers more broadly to ESG investing. “ESG” stands for “environmental, social, and governance,” and covers not just environmentally conscious investments but investments that promote corporate transparency, social justice and diversity.
Many companies that qualify for ESG portfolios or ESG-lens investing are not intentionally low-carbon or low-pollution, but the ESG lens excludes high-emitting and/or high-impact sectors like oil and gas.
Why Sustainable Investing Is Important Today
If you’re reading this, you most likely think of yourself as environmentally conscious. At the very least, you understand that humanity’s status quo is not good for the planet, or humanity itself in the long run.
However, even if you don’t need to be convinced that sustainable investing is “good,” it’s helpful to step back and see how the practice fits into the broader financial and economic landscape. Sustainable investing has benefits beyond funding solutions to urgent environmental challenges.
Creating Green Economies of Scale
Economies of scale occur when heavy investment and competition in a particular sector or niche drive down input costs (and production costs more broadly). This makes production more efficient per unit, which in turn increases output and helps grow the market for that output.
Many sustainable industries have benefited from economies of scale recently. One of the most dramatic examples is the solar panel industry. Solar panels first appeared on the consumer market in the 1970s, but because only a few manufacturers made them, they were expensive compared to fossil electricity. This changed in the 2010s due to rapid growth in production capacity, and now solar electricity is both cleaner and cheaper than coal and gas power.
Proving Out Potentially Transformational Technologies
Sustainable investors can also help those developing next-generation technologies to prove that they work at scale. Venture capital and private equity firms might invest in high-risk, high-reward technologies like nuclear fusion or deep-bore geothermal energy. These industries require huge amounts of capital to get off the ground, which wouldn’t be possible without investors willing to make risky bets.
Promoting Social Proof for Sustainable Solutions
For consumer-facing sustainable technologies, social proof is just as important as technical proof. One recent example is the electric vehicle market, which is now growing rapidly after years of consumer skepticism. Stylish, upscale offerings from companies like Tesla and Rivian now complement mass-market vehicles from Chevrolet and Nissan, showing that EVs are not just for rich or environmentally conscious people.
How Sustainable Investing Affects Your Life
This is all well and good, but sustainable investments take many years to pay off. Their impact is incremental at best and sometimes barely noticeable. And not everyone has the capital to contribute to a sustainable stock portfolio, let alone make direct investments in potentially transformational early-stage companies.
So sustainable investing might feel far removed from your everyday life. Does it affect you at all? Why should you care?
More Opportunities to Do Good in the World
By enabling environmentally friendly solutions at scale, sustainable investors create more opportunities for regular people to make a positive impact on the planet. 15 years ago, solar panels and electric vehicles were not economically competitive with the dirtier “mainstream” alternatives. Now they are, thanks to billions of dollars in capital investments that drove technological improvements and social proof.
Lower Cost to “Go Green”
Solar panels and EVs also show that aggressive investments in environmentally conscious solutions can bend the “cost curve” and make those solutions more affordable for everyone. A homeowner can put solar panels on their roof and install a home EV charger at little or no out-of-pocket cost, and thanks to innovations like net metering, they can actually save great deals of money over the systems’ lifespans. We see similar if less dramatic cost reductions in costs for green building materials, biodegradable packaging, and recycled clothing.
Better Health Outcomes for Your Family
Reducing carbon pollution and other negative environmental impacts, like water contamination and particulate pollution, promotes better health outcomes for all of us. This is true not just for those living alongside “point source” polluters like fossil fuel power stations and petrochemical plants, but for anyone who drinks tap water or lives in an urban environment.