In today’s increasingly socially conscious world, it’s no surprise that sustainability has also become a focus for many investors in the finance market. Obviously, wealth creation through financial gains is still important, but sustainable investing also considers a company’s ethical and environmental impacts on society as a whole. Here’s why sustainability and ethics investments are on the rise.
Gen Z and Millennials
After the unprecedented rally against GameStop (NYSE:GME) short-sellers by Reddit’s WallStreetBets earlier this year, Millennial and Generation Z investors are clearly already looking at things differently.
While they still sought financial gains from these “meme stocks”, they were also mobilized by GameStop nostalgia, aversions to shorting and creating meaningful change. If these two generations mobilizing their money can have an impact, it’s easy to see how sustainable investing will have a ripple effect for many years ahead.
Rather than simply padding their pockets with wealth, it’s Millennials and Generation Z who are leading the charge towards sustainable investing. Born between 1981 and 2010, these two generations already care about global issues, which is evident in how they live their lives.
They eat less meat, they recycle, they’re against deforestation, they drive EV’s, and buy organic. And as they inherit trillions from their Boomer parents over the next few decades, they’ll likely incorporate their socially responsible values into their investment strategies.
The growing popularity of earth-friendly ETFs
As they can no longer in good conscience ignore their investments’ ethical or social implications, investors are looking for gains while also making a positive difference within the world.
This is why so many world-leading brands now consider sustainability an important aspect of corporate structures and advertising strategies, from Apple (NASDAQ:AAPL) to Coca-Cola (NYSE:KO), and BMW to Adidas (DE:ADSGN). And with an increasing number of people interested in ESG (environmental, social, and corporate governance), there’s also been a surge in demand for ethical ETFs (exchange-traded funds) portfolios and sustainable mutual funds. Fast becoming favorites of investors of all generations, ETFs are ranked on things like environmental impact, clean energy, and other sustainability solutions. Sustainable investing isn’t just getting noticed, it’s starting to take over.
Product and strategy shifts in the market
As it evolves toward capitalism with more purpose, the investment industry is making ethical and sustainable considerations available throughout the process for anyone interested. These major shifts are also happening in many other areas and levels of the finance market. To start with, technological advances mean there are more ways for socially-minded investors to put money into the market, and barriers for novices to invest are also lower than ever before.
Improvements in the quality and availability of data mean ESG sustainability indexes can now be easily accessed. But corporations looking to embrace this ethical industry trend are finding they need to make changes to their existing cultures, technologies, processes, and other programs in order to align with the levels of sustainability required. That’s where greenwashing comes in.
Taxonomy, legislation, and greenwashing
As the demand for more sustainable investments is growing so rapidly, it’s becoming more appealing for companies without any green ethics to simply represent themselves as environmentally friendly. This is called ‘greenwashing.’
Europe is fighting this by introducing new taxonomy regulations for sustainability, which provide legal frameworks that ultimately define a genuinely green investment. For investments to be considered sustainable, economic activities underpin the investment must also meet the same screening criteria for environmental impact as the corporation itself. Unfortunately, the current taxonomy only monitors the environmental and climate-related factors. So to prevent all possible forms of greenwashing, conditions need to also be attached relating to the social and governance factors of ESG.
Not only will this prevent investors from allocating assets incorrectly to undeserving companies, but it will also mean more companies working harder to meet those green targets. For the moment at least, more education is required to ensure responsible investing.
The rise of ethical investing
Once considered as a fringe market for investors, the addition of ESG (environmental, social, and governance) factors into investment strategies over recent years has reached the mainstream. And climate-change concerns are a key driver of the ESG and sustainable investing boom. While ethical investment is certainly on the rise, it’s actually been around for quite a while.
And it’s not just because of COVID-19 either. Investing in environmental and social change was already anticipated to increase in late 2019. In fact, there have been a feeling investors should care about the actions of companies as well as financial returns derived from them since at least the turn of the last century.
The value of investments has historically been measured only by financial return. While that is still an important aspect, the impact of investment on ethical, social, and environmental considerations is also becoming increasingly prominent.
There’s now a growing number of activist investors who are putting their money where their mouth is when it comes to a wide range of social issues like climate change, income inequality, diversity issues, and even geopolitical instability. This provides people with the power to choose where they want money to be invested.
“We’re seeing that modern investors want to take more control of their portfolio, which includes everything from ensuring sustainability, diversification from the stock market, and collateral backing their investments. Crowdfunding platforms need to be sure to listen to their clients’ appetites and adjust their investment offerings accordingly.” Said Wittney Rachlin, Chief Marketing Officer at Yieldstreet. It’s little wonder that ethical investment is having its moment. As attitudes shift, so too are the ways that people invest. And if this trend continues, it will force companies to consider how their business dealings will impact the environment and society as a whole.