Most people invest because they have financial goals with long-term horizons (accumulation phase) or want to maintain a certain standard of living through retirement (consumption phase).
Accumulators seek to achieve their goals by saving (deferring today’s consumption to future consumption). Since they will not require their money for some time, their savings can be invested with the expectation of capitalising on the time value of money to generate growth of savings. Retirees aim to withdraw just enough capital so that the remaining principal can grow and replenish those withdrawals.
More investors are focusing on sustainability and how their investment decisions align with their views on preserving the environment and mitigating adverse climate effects. Inevitably, tensions arise between the lifetime financial goals of investors and the financial and environmental legacy they are leaving to future generations.
Scientists, industries, governments, and society in general are looking for ways to manage the trade-offs between improving people’s standard of living in the short and medium term and, in the long term, avoiding environmental damage that may inhibit humanity’s standard of living.
Investors can embrace these concerns through their behaviour and consumption decisions and can become effective agents of change. In response, fund managers have taken into account investors’ constraints and preferences. Older strategies simply excluded tobacco companies or firms involved with gambling.
To better address these sustainability considerations managers have now developed an enhanced approach to sustainability investing by collecting quantitative data used to systematically evaluate companies on sustainability issues.
A sustainability scoring system is applied using multiple variables to compare companies within the same industry, emphasising companies with higher-than average industry scores and excluding or underweighting companies with lower-than-average industry scores.
Sustainability encompasses more than just emissions. The strategy also penalises companies that use particularly intensive factory farming methods, companies identified as manufacturers of cluster munitions and mines that indiscriminately affect humans and the productive use of land, companies cited for child labour practices, and those linked to the production of tobacco.
This integrated approach to sustainability investing together with a robust investment design, offers investment solutions for investors wanting to pursue higher expected returns while upholding their environmental values.