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The 5 Most Common Forms of Sustainable Investments

Posted by
Anita Belitz Krasniqi
on
Friday, March 11, 2016 - 07:30

Given the lack of a common definition of the term sustainable finance, there are many different forms and approaches to it. If we focus on the investment side, for instance, the Global Sustainable Investment Alliance, distinguishes between

 

  • Screening
  • Integration
  • Sustainability-themed investing
  • Impact or community investing
  • Corporate engagement or shareholder activism

 

On the investment side, there are at least five classifications of sustainable finance: screening; integration; sustainability-themed investing; impact or community investing; and corporate engagement or shareholder activism.

 

Screening refers to the technique of restricting the investment universe according to predefined criteria. For example, screening could consist of refraining to invest in companies or assets that relate to specific activities (e.g, coal production, tobacco, alcohol, military) or that do not meet certain environmental or norms-based standards (e.g., defined by organizations such as the OECD). Screening is not necessarily negative, that is to say exclusionary, but can also be positive in the sense of overweighting assets, companies, sectors or projects based on their environmental or social characteristics and performances. Such positive screening is also sometimes referred to as Best in Class.

 

Integration is the systematic and explicit inclusion of environmental, social, and governance (ESG) criteria into traditional financial analysis and decision making. An integrated investment approach would consist of deriving investment and financing decisions from the joint evaluation of both ESG criteria and more traditional financial criteria.

 

Sustainability themed investments are typically defined as investment strategies that address specific sustainability issues such as climate change, food, water, renewable energy, clean technology, or agriculture. Examples of such strategies would be investment funds that invest in assets related to energy efficiency, clean water or sustainable agriculture.

 

Impact investments are investments made into projects, companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Such impact investments often occur in private markets.  For more information, see the Global Impact Investing Network

 

Community investing is similar to impact investments and as such also aimed at solving social or environmental problems, where capital is specifically directed to traditionally underserved individuals or communities. To some extent microfinance can be regarded as a form of impact and community investing.

 

Finally, Corporate engagement and shareholder action refer to the technique of using shareholder power to change and influence corporate behavior. Such corporate engagement typically occurs through directly engaging with the managers of companies (i.e., communicating with senior management and/or boards of companies) or through filing of shareholder proposals, and proxy voting that is guided by ESG criteria.

 

More information on these topics is available in the Global Sustainable Investment Review 2014.  The Global Sustainable Investment Review 2014 is a collaboration between members of the Global Sustainable Investment Alliance and the Japan Social Investment Forum. The report provides statistics on the size of the sustainable investment market worldwide.

 

Faculty expertise provided by: Prof. Philipp Krüger.