Sustainable Investing: Balancing Profit And Purpose

By Joseph El Am, General Manager, MENA, StashAway

The climate crisis is the defining challenge of our time. The first half of 2024 saw temperatures reach a 175-year record, clearly illustrating the urgency of the situation. It’s often said that everyone, as individuals, can and should vote with their wallets – something that goes beyond choosing sustainable products to encompass sustainable investing.

As the magnitude of climate change continues to grow, investor interest in sustainable investing has also risen, with over half of global investors planning to increase their sustainable investments in the next 12 months. ESG investing is one-way individuals can help promote a more sustainable, just, and equitable world by supporting companies that are accountable for their environmental impact, socially responsible, and committed to fair and transparent business practices. Still, for most investors, financial returns remain the main priority – which raises the question: Is it possible to balance profit with purpose?

WHAT IS SUSTAINABLE INVESTING?

As a starting point, let’s first look at what sustainable investing actually means. Firstly, there’s ESG investing, which considers the environmental, social, and governance (ESG) factors of a company. It gives investors a framework to assess how sustainable and long-lasting an investment is likely to be.

ESG is practical because its framework can help investors identify future-proof companies. Investors can use ESG to help them avoid investing in companies that engage in risky or short-signed behavior, which can cost a company and its shareholders more. Indeed, studies have shown that companies with strong ESG performance tend to outperform their peers in the long term. A 2023 McKinsey study found that companies that deliver strong performance in both financial and ESG metrics deliver 2% higher annual excess total shareholder return than those that excel only in financial metrics.

ESG INVESTING ISN’T ALWAYS THAT STRAIGHTFORWARD

While the benefits of ESG investing are clear, the road towards it can be difficult to map out. The way in which we define and regulate ESG is often complicated by the challenges of measuring ESG criteria. Environmental and social practices aren’t universally regulated nor quantifiable in financial terms yet. For example, there’s still no universal standard for measuring the harm a company causes its workers or to which extent a company is responsible for its supply chain. These factors make regulating ESG difficult compared to traditional investing, which has established standards on financial reporting. The limitations of reporting ESG data are often a key barrier holding investors back from making sustainable investments.

While the way experts define and regulate ESG will likely evolve as we seek out better means of measurement, institutions have already developed ESG scoring to help fund managers build ESG-friendly portfolios. MSCI and Morningstar, for example, designate ESG ratings based on how a company manages its ESG risks compared to other companies within the same industry. Such industry-recognized ESG scoring models can help investors make well-informed decisions that align with their values. Our Responsible Investing Portfolio, for instance, uses both the MSCI ESG rating and the Morningstar Sustainability Rating to provide an average of the two scoring models, offering environmentally conscious investors better visibility into their portfolios.

INVESTING IN THE FUTURE OF CLEANTECH

Thematic investing in environmental tech is another way to invest in companies that help shape a cleaner and greener world. While ESG investing looks at a broad range of companies across industries and considers additional factors like diversity and social responsibility, thematic investing can focus specifically on the environment industry, from renewable energy to smart grids and waste management technologies. The environment tech sector is expected to see significant growth in the coming years, driven by net-zero emissions goals by governments around the world and technological advancements. Take clean energy for example – the International Energy Agency found that global clean energy investment has increased by nearly 50% from 2019 to 2023, reaching USD $1.8 trillion last year. In the Middle East region, countries have pledged to add 62GW of renewable energy capacity over the next five years – a pace of growth that is more than three times the previous five-year period.

As advancements in AI take the world by storm and drive energy consumption, the need to invest and build up our renewable energy capacity will likely only accelerate further. Investing in such cleantech sectors allows investors to not just make a positive impact on our planet and societies, but also diversify their portfolio with exposure to technologies with high-growth potential.

RESPONSIBLE INVESTING THAT SUITS YOUR PERSONAL GOALS

We’ve discussed the different ways to invest with sustainability in mind, and how such environmentally responsible investments don’t have to come at the expense of long-term returns. Even so, how each individual approaches sustainable investing will still depend on your financial goals and risk appetite (as always!). For those just starting their financial journey, consider a well-diversified portfolio optimized for both performance and ESG. Building such a core investment portfolio as a foundation can help you work towards long-term financial goals, such as saving for retirement. On the other hand, investors ready to diversify further and gain greater exposure to new sectors can look at thematic portfolios with a focus on environment and cleantech. Whichever path you choose, it’s clear that sustainable investing can balance both profit and purpose, while staying in alignment with your financial goals.