6 Things About Sustainable Investing You Should Know
Many of us have heard about the gender investing gap, where women tend to invest less than men do. In the US by the time we retire, this generates an average difference in wealth of $1 million between men and women!
At the same time, when it comes to investing ethically, 84% of women have said they’re interested in sustainable investing as compared to only 67% of men. Is not knowing how to invest ethically one of the things holding you back from investing at all? If so, here are 6 things about sustainable investing you should know.
- Women are fueling ESG (environmental, social, and governance) trends in investing
In the UK finance industry, women on average make up 17% of senior managers and investment advisers and managers (22% in the US). The gender gap in financial services leadership is stark and persistent, something that’s no secret to women working in the industry. Incredibly though, 44% of the top ESG jobs that recruiter Acre Resources helped fill went to women.
Whereas often leadership roles given to women in finance are in “back office” roles such as HR or marketing and communications, women’s leading role in ESG is critical given the rapid growth the sector has experienced in recent years. As Millennials age, accrue more wealth, and become a larger proportion of the overall investment pool, interest in ethical and sustainable investing has only increased. This has put pressure on global financial institutions to treat ESG as a primary focus and not an afterthought of investment strategies, paving the way for women fund managers and investors to play a leading role in the industry.
2. Investing ethically does not have to mean sacrificing returns
Ethical investing consists of various tiers such as responsible investing, sustainable investing, and impact investing. Each tier has increasing restrictions on what their funds are willing to deploy capital into.
Responsible investing seeks to avoid harm, but doesn’t actively seek to create solutions. An example would a fund that avoids investing in coal or other technologies that have a known and disproportionately negative impact on the environment or other sectors of ethical investing. Responsible investing strategies typically target the same returns as traditional investing strategies, so you can avoid harm while maintaining the same returns you normally would.
Sustainable investing is the next tier of ethical investing. Here, strategies seek to avoid harm and influence positive change. An example could be a renewable energy fund. Similar to responsible investing strategies, sustainable investing strategies equally try to achieve the same return profiles as traditional strategies do.
Impact investing involves actively creating positive change, sometimes taking on greater risks to potential returns outcomes than the other strategies might. Examples could be funds that buy certain types of bonds in developing markets, or a venture capital fund that invests in start-ups with female CEOs. Some impact funds target the same returns as traditional funds, whereas others are willing to take on greater risks than similar traditional funds might. Impact investing is more case-by-case, so it’s important here to do your due diligence.
3. Cryptocurrencies like Bitcoin are exciting, but the environment may be paying the price.
Bitcoin alone uses more than 121 terawatt hours (TwH) of electricity a year, which would rank it in the top 30 electricity consumers globally if it were a country. That’s 10x the consumption of Google, and nearly double the consumption of Bangladesh, the 8th most populous country in the world.
Keep in mind this is only Bitcoin — other cryptocurrencies as well as NFTs also have a huge impact on the environment. The high consumption is due to two factors:
- Mining, or the process of “creating” new coins, and
- Transactions, given the data-heavy algorithms used to ensure a transaction’s validity
Mining is particularly onerous because a large proportion of Bitcoin in particular is mined in China, where energy is cheap and largely consists of coal as opposed to renewable resources.
Similarly, as prices increase and as Bitcoin becomes increasingly popular, the larger quantity of transactions consumes an ever-larger amount of processing power to validate.
New cryptocurrencies such as Chia are looking to find solutions to the ever-growing detrimental impact traditional cryptos are having on our environment, but for now, it’s important to consider potential negative externalities next time you jump on the latest crypto trend.
4. There’s more to sustainable investing than preserving the environment
Sustainable investing focuses on all three ESG components — environmental, social, and governance.
Social focuses on elements of companies such as whether they respect human rights (i.e., do they use child labor? What is their treatment of migrant workers or other disenfranchised employee groups?), animal welfare, and diversity.
Governance involves taking a view on how ethical the company’s management structure is, as well as factors such as employee compensation relative to similar companies and general employee relations.
5. Sustainable investing doesn’t have to be complicated
Luckily, due to the high demand of sustainable investment strategies both from retail investors (individuals) as well as large institutional investors (pension funds, sovereign wealth funds, etc.), many fund managers have established track records of managing ETFs and other pre-packaged investment products that can make sustainable investing much easier.
Vanguard and Blackrock (iShares) both have ESG funds that are publicly traded, as well as clean energy funds. SPDR SSGA Gender Diversity Index ETF (SHE) is a fund that invests in companies with gender diversity metrics ahead of their competitors, and the Impact Shares NAACP Minority Empowerment ETF (NACP) seeks to track the Morningstar Minority Empowerment Index. So while you should always do your homework before choosing an investment that’s right for you, nowadays it’s much easier to choose ethical investment strategies than it would have been historically.
6. Money talks!
We all know that money is power, so when you invest ethically, you’re sending a message to fund managers about what is important to you. The more capital flows into sustainable investing strategies, the more advanced these product offerings will become. Not only are you doing something good for those people working for companies you’re investing in, you’re contributing to creating a virtuous circle of ethical supply and demand dynamics!
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