Conscious Investing, also known as Socially Responsible Investing, has been on the rise rapidly for the past five years but it has been around for way longer than that. The Conscious Investing model was introduced in the ‘70s and has grown to be a $12 trillion industry and constituting ¼ of the total assets being managed in the U.S.
Although it has been around for this long, more investors have started gravitating towards them because they realize that it is possible to invest sustainably that adds value.
Mohnish Pabrai Returns 10.1% In 2020, Changes Strategy [2020 Letter]
Mohnish Pabrai's flagship hedge fund, the Pabrai Investment Fund II, returned 29.6% in the second half of 2020. Following this performance, the fund returned 10.1% net for the year, underperforming the S&P 500 but outperforming the Dow Jones Industrial Average, which returned just 9.7%. According to a copy of the investment manager's year-end letter to Read More
Most probably, this industry will be one of the very few to survive the next recession in the USA, but where is it headed in 2020 and beyond? In 2020, investors will be focusing much on the following points.
Caution on conscious investing in climate change-related companies
The controversial matter of climate change is gradually proving that it is affecting Earth’s population to those who deny its existence. The negative effects of climate change are abundantly clear, water levels are rising, glaciers are melting and in certain parts of the world, there are flash floods.
For the most part, climate change was caused by companies that preferred profit over preservation and that lead to these long-term ramifications. Unfortunately, not only the general public suffered but also companies depending on the environment suffer from this scathe.
For example, seafood companies are directly impacted by droughts because they can’t fish in dams and rivers when they are evaporated. Also, companies need to relook their location and type of business they do. It would be unwise for a data storage company to set up shop near a river shore or in a place prone to have a flood.
Companies have to analyze environmental, social and governance (ESG) data before commencing any operation. Investors should do so the same when they consider widening their investment portfolios to avoid having underperforming assets. Investors should also discourage business activities supporting climate change.
Instead of focusing on the balance and price-earnings ratios, investors should look into the impact climate change will have on the business. On the flip side, investors should also look into business models that won’t harm the environment. Funding businesses with climate-sensitive dynamics will hurt your investment in the long run and therefore isn’t a sustainable investment.
Analyzing the ESG data has been made very simple because there are companies that do this for busy individuals that can’t do it for themselves. These companies use scoring methods that assess factors such as supply chain risk, heat stress, sea level risk, etc.
Fair salaries and wages to all
The mandatory transparency of most companies with shareholders dictates the decision-making of conscious investors. Data provided to shareholders also include executive compensation, which might be a deal-breaker for some investors.
More especially since publicly traded companies have been directed to publish their CEO-to-worker pay ratio. Although this may be discouraging to employees, investors can make sound decisions based on that because unfair pay wages also tip the scale on the ESG scoring.
Disney’s CEO, Rober Iger, bore the full brunt of this matter when it was discovered that he earns $65 million. His employees were obviously unhappy, but the mood also spread to a large number of investors. 52% of Disney’s shareholders disputed his pay and cast votes against this overcompensation.
Overcompensation factors in as social injustice and investing in companies that promote this behavior is the equivalent of blurring out the effect this has to the least earning employees.
Overcompensation is also related to reputational risk, which means that a company’s reputation will be tarnished by this. How does this happen? A company that pays millions of dollars to CEOs but has employees living on minimum wage doesn’t reflect a great image.
As the regulation to publish the CEO-to-worker pay ratio has been implemented recently, you can expect seeing conscious investing focusing more on the matter of overcompensation this year.
Overcompensation is a serious matter to the extent that a company can face serious financial problems if they don’t address it. Sustainable investors will aim to avoid all companies that can prove financially risky to invest in. Fair pay for all is an ESG metric that also serves to prove that you can be a productive entrepreneur that still cares for the financial needs of its workers.
Converting from human to machine advisors
Generally, when the name financial advisor is mentioned, the first thing people think about is a suited man or woman speaking economic jargon hard to understand.
Financial advising has used that approach because of the personal touch added to meeting the person responsible for the decisions you make financially. It really brings peace of mind but SRI investors are starting to look into other methods that include digital advisors.
When the concept of conscious investing started out, not much advising work was required because the options a potential investor had been quite narrow. On the contrary, there are a plethora of choices now and making the perfect investment decision can be a challenge.
The ease of decision making has been made available at an affordable price because of digital developments. These developments have brought forth inventions such as Robo Advisors which caters to those comfortable going the digital route with their investments. Robo Advisors offer sustainable portfolios that are personalized for each investor according to the goals and risk profile of each individual.
These advisors cater to aspirant investors that don’t have the necessary knowledge or time to do so. Robo Advisors are slowly starting to grow and the providers are starting to offer more products to sustainable investors.
It is the most efficient way to invest sustainably, especially since the majority of millennials always use their smartphones. However, if you choose the hard way of doing all the research yourself, you might slack in your college or schoolwork. In that case, you can ask for assignment help.
Avoiding plastic investments
Plastic in landfills and seawater can seem like a lot to see but that’s just the tip of the iceberg. Over the last few decades, an estimated amount of 8 billion metric tons of plastic has been produced. 80% of this plastic ends up where it suffocates the environment in various ways.
For example, some sea creature species are facing extinction events and might forever disappear. Whales, fishes and other sea creatures are washing up on beaches. The cause of death is usually ingesting plastic and this has become a call out to investors. The ecosystem cycles are negatively affected and companies are recognizing that this will be a liability for them.
Numerous initiatives have been initiated by big companies to decrease the use of plastic packaging and offered other good alternatives. Those alternatives include reusable bags, glass containers, and other packaging methods. The green packaging industry is a rapidly growing sector and has a lot of sustainable development.
There are greener pastures for companies involved in paper-based packaging and they stand to draw in the largest amount of investors. As plastic is getting scrutinized by consumers and certain companies, investors should also revisit this matter and look into more sustainable packaging methods they can invest in.
Revisiting your investment portfolio is very important but so is the level of professional services you use. Always consult the best investment advisors who are known to have rich experience in the advisory field.
Free and easily accessible data
Making an investment decision on the blind is the worst thing you can do. Since sustainable investing is a new concept, potential investors have been working on getting more information.
Sustainable investing hasn’t been in the public eye for a long time but this industry has managed to provide accurate data in one of the major financial news outlets. Yahoo Finance and its partnership Sustainalytics provides data on sustainable investments for free. More data firms promise to release information for free, which ensures the future of free investment-related information.
In 2020, you can expect major progress in the delivery of data and major promises have been made in accordance with freely available information. The Sustainability Accounting Standards Board (SASB) has released 77 industry-specific standards that assist investors in understanding how certain issues impact a company’s performance. Data helps add value to portfolios and improve efficiency in investment decisions.
Free data won’t only spark interest to other people but it will also improve the quality of investment. When people have access to information, they will make more informed decisions and will invest in companies that really add value. Also, since transparency regulations are being amended and created from time to time, you can expect even more information being available.
The availability of such data will help evaluate risk and spot potential opportunities before they pass. Reading all the available material can also take up your time and to solve that problem, you can use the services of the best paper writing service.
Building a sustainable portfolio
When building a portfolio, some investors may decide on investing in companies that fall on one of the letters in ESG. For example, they might focus on environmental matters too much or on social problems or maybe the governance of the company. That often blurs out the whole picture and can be lead to bad investment decisions.
The perfect company that a sustainable investor would go for is one that has great corporate governance, interacts well in the community they are in and treats their employees well.
When a company makes operational decisions in consideration of the environment, it is also a great metric of the sustainability of the company. When evaluating a company, professionals look at it two-fold, the first thing to do is to consider the degree of exposure of a company to negative elements.
Afterward, they then evaluate how the company is managing those issues. When building your portfolio, keep these measures close in mind, especially when comparing different companies.
How is the future looking for conscious investing?
It is predicted that big companies will come into play into this industry and the scale of accountability will be highly increased. Also, as problems such as poverty on a global scale, climate change and megatrends are gaining traction, the big players will need to step in.
Retail investors are also closely watching this transformation as they are focused on ESG investments. Those investors include pension funds, endowments and labor unions, which shows that there is much potential in this industry.
Final thoughts on conscious investing
Conscious investment has always been about investing consciously and knowing how the investments you made affect Earth’s population. In 2020 and the following years, you can expect that there will be more conscious decisions, especially since information continues to abound. If you don’t like researching, you can opt for digital financial advisors. They will guide you and help you make great ESG investment decisions.