For many, the most important characteristic of any investment portfolio is stability. This is why most investment literature is littered with the word “diversification.”
Through developing a portfolio that mixes stocks, bonds, and commodities together, risk can be minimized, as each of these assets responds differently to the same market conditions.
While diversification is key to maintaining a stable investment portfolio, sustainable investments (which should also be diversified) are another option for consumers who value stability over other investment factors.
Sustainable investing is the practice of investments only being made to companies practicing ESG, or environmental, social and governmental best practices.
Typically, factors such as carbon emissions, recycling rates, workers’ rights and protections, worker compensation and turnover are used to evaluate the success of a company’s adherence to ESG.
Each category is briefly broken down below:
Environment: As climate change and resource depletion plague the world, investors are now factoring sustainability into their investment choices. This is both for moral and stability reasons.
Social: Diversity continues to be aggressively sought by today’s population, and investors are no different. Diversity brings innovation and new perspectives, both of which are appealing to investors. Consumer protection is another major aspect of the social branch of ESG.
Governance: Perhaps the most misunderstood aspect of ESG, governance refers to the structure and management of a company. Executive and employee compensation are major factors in governance, along with employee relations. Investors want to put their money where workers are happy and productive, not overlooked and overworked.
While sustainable investing has more to do with individual morals than traditional investing, there are still some fundamental similarities. For example, the first priority of both sustainable and traditional investments is to generate positive returns.
There are two main reasons why investing in companies practicing ESG principles is beneficial.
Firstly, the demand for more conscientious products has exploded, and investors can use this to their advantage. Specifically, environmental concerns have grown as research continues to show the rapid degradation of the natural world.
According to Nielson insights, 69 percent of North Americans say it is extremely or very important that companies implement programs to improve the environment.
In emerging markets, such as those found in Latin America, public support for company-driven environmental programs reaches as high as 94 percent.
This clearly shows that consumers have a preference for more responsible production. As environmental conditions continue to degrade, those who have invested in companies practicing ESG will be rewarded.
Secondly, there is built-in stability when investing in companies that worry about more than the price of their stock.
Companies that are stock price-oriented tend to focus on generating large short-term profit, but often ignore potential future threats which could damage the company’s market stability.
When workers’ rights, environmental protection, or the work atmosphere are ignored, problems tend to grow in scale. Oil spills tend to result in lawsuits, which can damage stock prices and investor confidence.
By promoting growth in companies that are looking out for the environment, its workers and the future, individuals can ensure greater stability in their investments, while contributing to a more positive business atmosphere.
