Perspective - Investing Daily

Reduce, reuse, recycle... and investing

With Earth Day - arguably the largest ‘day of action’ in the world - last month, we take a look at how lessons from our childhood might impact our investment decisions.

09/05/2019

Maggie Sullivan

With Earth Day - arguably the largest ‘day of action’ in the world - last month, we take a look at how lessons from our childhood might impact our investment decisions.

What is Earth Day, you ask? Kathleen Rogers, president of earthday.org, explains on the website:

‘On April 22, 1970, millions of people took to the streets to protest the negative impacts of 150 years of industrial development.

In the US and around the world, smog was becoming deadly and evidence was growing that pollution led to developmental delays in children. Biodiversity was in decline as a result of the heavy use of pesticides and other pollutants.

The global ecological awareness was growing, and the US Congress and President Nixon responded quickly. In July of the same year, they created the Environmental Protection Agency, and robust environmental laws such as the Clean Water Act and the Endangered Species Act, among many.’

It is now believed more than 1 billion people in 182 countries now take part in Earth Day, a political day of action, each year.

Read on to find out what any of this has to do with investing…

‘Reduce, reuse, recycle’

This was the mantra introduced in the ‘70s as a campaign to promote environmental awareness, especially in children. The aim was sustainable practices would become embedded in their values and shape lifelong practices.

My childhood is sprinkled with memories of recycling projects, Earth Day shirts and watching the cartoon Captain Planet, the environmentalist TV program. But how did the lessons I learned stick with me as I grew up and entered adulthood? And now that many millennials are considering investing for their future, how do these lessons impact their investment choices?

Do we still care?

How millennials vote for sustainability with their wallets

Even though my Earth Day celebrations of primary school days are long behind, for me, and many other millennials, these lessons have had a lasting impact. 

We might not always recycle, but many millennials choose to vote for sustainable practices with their wallets.  Millennials continue to be most willing to pay extra for sustainable offerings – almost three-out-of-four, up from approximately half in 2014, according to research.

Many millennials are adopting ‘flexitarian’ and meat-free diets, with an increase of reports considering the environmental impacts of factory farming.

Unlike previous generations, millennials are more connected with global issues and the challenges the planet faces. The rise of digital and social media resources have increased access to information that is driving our generation to consider these factors.

How this shapes investment choices

According to Schroders’ most recent Global Investor Study 2018, those aged 18 to 36 are allocating an average of 41% of their portfolios to sustainable investments, while those aged 65 and over have an average of 34% of their portfolio in sustainable investments.

These attitudes could shape the investing landscape as millennial investors are poised to represent 24 trillion in assets by 2020 and are set to inherit an additional 30 trillion in assets with the transfer of wealth from baby boomers. 

The world of environmental, social and governance factors and sustainability investing is vast and complex. Not to mention the fact that the application of sustainable approaches varies depending on where you are in the world. To help break through the jargon, here is a quick overview of some different investment approaches:

Ethical investing

Also referred to as negative screening, socially-responsible investing or SRI. This investment approach involves making a point of NOT investing in certain companies based on their products and practices. This is determined by the investor’s own principles or beliefs. For example, ‘carbon free’ or ‘war free’ investment products screen out stocks that derive profits from carbon fuels or weapons. Meanwhile religious investors might seek to avoid ‘sin stocks’, which get their profits from activities such as tobacco, alcohol, gambling or adult entertainment. 

Impact investing

Impact investment products have the primary goal of achieving specific, positive social benefits while also delivering a financial return. This is more common in private markets (ie not the stock market) and recipients tend to be small companies with clear social goals, who otherwise may not have access to capital. There are also ‘renewable energy’ funds, which find investment opportunities in companies producing renewable energy. 

Thematic investing

Closely aligned and many times also referred to as impact investing, a thematic investment approach takes into account broad themes, such as a climate change or demographics, and creates a portfolio that invests across industries aligned with the theme.

Sustainable investing

Sustainability analysis, when integrated with more traditional ways of measuring a company’s prospects, can potentially improve insights and enhance performance. 

This can mean considering features that ensure companies, industries or markets can operate within their means and maintain stability over the long term.

The aim is to provide a more complete understanding of future opportunities and risks compared to traditional analysis. Sustainable investing can also mean the exclusion of certain activities or industries, but rather than being driven by ethical motivations, this will be because these industries might face deep-seated problems that make them poor long-term investments.

 

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