What Companies Should You Avoid When Investing Sustainably?

Investing sustainably is a strategy that seeks to ensure that companies generate positive social and environmental impacts, as well as long-term financial gains. It involves excluding certain types of investments or, specifically, including certain types of investments in a portfolio according to the values of each one. However, there are some companies that should be avoided when it comes to sustainable investing. A company that spends enormous sums of money trying to address every environmental, social and governance (ESG) issue imaginable will likely see its financial performance deteriorate.

On the other hand, companies that focus on material issues tend to outperform those that don't. The diverse, unregulated and inconsistent practices of sustainable investment also represent an enormous challenge to its effectiveness. Asset owners, such as pension funds, are increasingly demanding sustainable investment strategies from their asset managers. The key to the new generation of sustainable investment is that it focuses only on “important” ESG issues affecting the valuation of companies; for example, greenhouse gas emissions are important for an electrical service company, but not for a financial services company; supply chain management is important for a clothing company that uses low-cost workers in developing countries, but not for a pharmaceutical company. The biggest obstacle to investment is that most corporate sustainability reports are not aimed at investors but at other stakeholders, such as NGOs, and are therefore of little use to investors. A corollary to the erroneous belief that sustainable investment involves sacrificing part of financial return is the belief that fiduciary duty means focusing solely on profitability, ignoring the ESG factors that may affect them, especially over time. CERES, a non-profit organization whose objective is to change corporate environmental practices, has developed tools that investors can use to find out how companies are addressing climate change and water risks, how to assess companies' progress towards the goals of net zero emissions, track shareholder proposals on ESG issues, interact with companies and more; it also coordinates the Investor Network on Climate Risk to promote sustainable investment practices.

A notable example of sustainable investment is the strategy developed by Mats Andersson (former executive director of AP), Patrick Bolton (professor at Columbia) and Frédéric Samama (co-director of institutional client coverage at Amundi Asset Management), which allows long-term passive investors to hedge climate risk without sacrificing profitability. One form of active participation are power resolutions and proxy voting, an aspect of the active ownership strategy for sustainable investment. More and more investors, especially younger ones, want to invest in companies that take into account climate risks and that are sustainable and socially responsible. When it comes to sustainable investing, there are certain types of companies you should avoid. Companies that spend too much money trying to address every ESG issue imaginable will likely see their financial performance deteriorate. Additionally, companies that don't focus on material issues tend to underperform those that do.

Furthermore, corporate sustainability reports are often not aimed at investors but at other stakeholders and therefore provide little use for investors. In conclusion, when investing sustainably it's important to be aware of which types of companies you should avoid in order to ensure long-term financial gains. By focusing on material issues and avoiding companies with excessive ESG spending or irrelevant sustainability reports you can ensure your investments are successful.