Decoding Sustainable Investing in WealthTech
Sustainable Investing allows you to invest your money while positively impacting the environment (or at least not exploiting it) without sacrificing your personal, moral or religious ethics. Its popularity can be credited to rising climate change awareness and greater public pressure on corporate responsibility.
Sustainable Investing is also known as - Socially Responsible Investing (SRI), ethical investing, Environmental, Social and Governance (ESG) investing, impact investing, values-based investing, conscious investing and green investing.
While most of the terms are used interchangeably, there are some key differences -
ESG is a set of guidelines and frameworks that measure a company's sustainability in three categories: Environmental, Social and Governance. Each category covers a wide range of factors on which the non-financial performance of a company or an investment project can be measured.
With the help of various factors like shifting global focus and changing investor profiles, ESG has become a part of mainstream investing. You can invest in companies that meet specific requirements and are mindful of the environment, human well-being, and the economy.
ESG’s impact on the investment landscape is visible as investment firms are expanding their business models to include frameworks to keep up with their investors.
For example, in December 2021, Norges Bank Investment Management, the world’s largest sovereign wealth fund, conducted a risk-based screening of 442 companies and decided to refrain from investing in nine of those firms.
Ethical Investing works similarly, where individuals invest in companies that fit their ethical code. Some investors may avoid specific industries and only invest in those that align with their personal views. For example, some ethical investors may choose to eliminate their investments in alcohol, tobacco, gambling or the firearms industry (sinful stocks).
Impact investing is made to help a company or business achieve a goal beneficial for society or the environment. This investing style prioritises social and environmental benefits alongside the expectation of financial returns. For example, impact investors may look to invest in the education or the health sector, or microfinance loans to support small ventures in underdeveloped countries.
Benefits of Sustainable Investing
Sustainable investing allows you to build a responsible portfolio and contribute to positive global change with your money in a way that aligns with your ethics or moral code. In addition, it enables you to act against malpractices, inequality and climate change indirectly.
Businesses with high ESG scores have also shown to reduce a portfolio's overall volatility due to additional risk filtration.
ESG can sometimes be controversial too!
Alongside the rising popularity of ESG, there is a growing concern for greenwashing. Greenwashing simply refers to the tactic when companies provide misleading statements or claims about the sustainability of their business model, product or service. From an investment perspective, it would mean that your investments in such funds won’t bring the expected positive effect.
Recently, an investment banking company came under the radar on suspicion of fraudulent advertising of sustainable funds. (the company rejected the allegations.)
The Economist, in 2021, studied the world’s 20 biggest ESG funds and found that each of them held investments in fossil-fuel producers, while others held stakes in oil producers, coal-mining, gambling, alcohol and tobacco.
Though the rising interest in sustainable investing brings challenges as well as opportunities, companies with integrated ESG frameworks are bound to see an increase in operational efficiency and client engagement.
WealthKernel intends to bring accessible financial services to underserved markets, with responsible investing and exceptional customer experience at its core. Using our flexible investing API as one of the building blocks of their business, investing app Stratiphy looks to help users align investments to their values with the help of ESG ratings.
Similarly, halal and ethical-focused investment firm, Wahed, launched the world’s first automated halal robo-advisor and an app for its socially conscious customers with the help of our API services.
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