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What Is Sustainable Investing?

The differences in investing approaches

Morningstar Staff

 

Socially responsible investing. Divestment. Impacting investing.

As the popularity of sustainable investing has increased, so has its complexity. So much so, in fact, that the terms and approaches associated with sustainable investing seem to be as vast as the reasons and values of the investors who choose to build their portfolios this way.

Many nuanced investing approaches fall under the sustainability spectrum, accompanied by a host of often-confusing names and information. The differences in these approaches come from what each aims to accomplish and how. So what are these approaches, what do they mean, and how do you know which is right for you or your clients?

What exactly is sustainable investing?

Morningstar defines sustainable investing as a long-term approach that incorporates environmental, social, and/or governance factors into the investment process. These factors are often shortened to “ESG.”

Sustainable investors make investment decisions after considering information that may include a company’s environmental record, how it treats employees, and how it pays its executives—just to name a few examples. ESG scores can help with the process by adding these factors together to provide one overall picture of a company. You could invest either in these company stocks directly or through a mutual fund that holds stocks or bonds from companies with high sustainability ratings.

Sustainable investing originally had its roots in socially responsible investing, but the concept has since blossomed.

Some investors apply sustainability-based approaches as part of their portfolio, while others build their whole portfolio this way. And different investors have different motivations for using them. It’s helpful to think of sustainable investing as an overall destination with lots of different routes to get you there. 

This blog post is adapted from the white paper "What’s in a Name? The Many Dimensions of Sustainable Investing.

Get the full paper "What’s in a Name? The Many Dimensions of Sustainable Investing." 

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