What we call sustainable investing has developed significantly over many years.
Decades ago, ethical investing became a guiding principle for many investors. It was often rooted in the underlying religious beliefs of certain institutions or their benefactors. The concept of excluding investments in particular types of companies was based on the desire to avoid gaining benefit from activities contrary to the tastes of the investor. Exclusions-based investing is a way of avoiding negative externalities, or the unchosen costs and effects felt by being associated with a company. A typical exclusion would have been producers of alcohol or tobacco products, munitions or companies involved in gambling.
As this concept developed over time, a company’s attributes regarding environmental and social impact or its general approach to good governance, its ESG characteristics, were evaluated. An ESG-pedigree was considered alongside prospective returns. This approach encourages not only avoidance of undesired exposures but also a focus on selecting the best available among the potential candidates for investment.
Today, sustainable investing has extended to incorporate consideration of the positive impact or contribution an investment is expected to make. Companies are assessed on what they are explicitly doing to address the major environmental and social challenges the world is facing, as well as the scale and materiality of that impact. This approach allows investors to build investments in companies delivering attractive financial returns, but also positive such as benefiting society and the environment.
Asset owners increasingly want to commit their funds to investments that aim to achieve attractive financial returns, while also generating good outcomes and avoiding harmful or detrimental effects. Some asset classes are less accessible to smaller investors due to the large scale required for each individual asset or because of limited liquidity. For example, green bonds have a relatively small universe and green infrastructure tends to be less liquid and involves a longer time commitment. However, investing collectively and for the long term may significantly reduce those challenges. Scale and commitment can help facilitate investing in asset classes that previously may not have been possible.