Since 2019, sustainable investing has grown above 50 per cent annually. Historically, Sharia-compliant investment have focused on values-alignment and excluding ‘sin stocks’ like gambling, defense, and tobacco. Sustainable investing includes financial, social, and environmental goals.
Sustainability investing can help investors combine their beliefs and missions with their financial ambitions. In the UAE, 86 per cent of business decision-makers value sustainable investing.
Sustainable investing has sparked both excitement and confusion, for some in roughly equal measure. Many myths surround this investment approach. These myth-busting facts will help investors understand why the sustainable investing market is expanding rapidly.
Myth 1: Sustainable investing cannot drive change.
Fact: Investors can make a difference — particularly through active managers with corporate engagement strategies.
Every organization affects its environment, sometimes for the better (by being a good employer) and sometimes for the worse (e.g., by polluting a local ecosystem). Investors can sponsor certain outcomes through sustainable investing.
For example, investors can choose to engage in equity funds that actively partner with organizations to reform their practices from within.
Sustainable funds promote climate governance, workforce diversity, plastic reduction, animal welfare, and data privacy. They sometimes seek board seats to have a bigger role in governing enterprises. Actively managed funds that engage directly with firms can affect change.
Myth 2: Investors can’t make money from sustainable investing
Fact: We have seen sustainable investing strategies outperform the market
There are two ways in which sustainable investing can help drive financial returns:
1. Focusing on material environmental, social, and governance-related (ESG) risk. Data, corporate disclosure, and regulatory reporting on ESG issues give investors new insights into how companies handle these factors. ESG issues in a company’s sector might reduce investment risk if addressed correctly.
Important ESG elements (such as human capital management) can affect a company’s business model and value drivers positively and negatively.
2. Identifying growth-oriented mega-trends
Megatrends impact the economy and society. Wind, solar, smart grids, and energy storage are examples. Investing in market-reshaping mega-trends can lead to growth.
Myth 3: Sustainable investing is just for activists and environmentalists.
Fact: Sustainable investing encompasses many objectives and values.
Thirty-one per cent of those who don’t invest in sustainable funds believe it’s for environmentalists and activists only. However, sustainable investing is sought by a far greater portion of the investing public for many reasons.
Thirty-eight per cent of investors believe it makes business sense, 37 per cent say it’s the future of investing, and 32 per cent expect it to boost their investment performance.
Many long-term sustainable investors seek financial rewards, but others invest in education, healthcare, and diversity. Sustainable investing helps achieve environmental, financial, and social goals. Your portfolio shouldn’t hinder social or environmental philanthropy.
Myth 4: Investors need to have a lot of money to sustainably invest.
Fact: Investment minimums for sustainable investing are low and dropping lower.
Sustainable investing was once for the ultra-rich (i.e., for investors who could dedicate large allocations and significant staff time to the work required). Today, sustainable investing minimums are low and falling. This makes the strategy more accessible to a wider audience, especially younger investors with modest, incremental investments.
Myth 5: Sustainable investing is all about start-ups.
Fact: Sustainable investing can be used for start-ups, mature firms, and even governments.
Sustainable investing is generally associated with early-stage enterprises like venture capital or social ventures that support a community or emerging economy. This is too narrow. Sustainable investing offers investment options for businesses of all sizes and sectors.
It can be employed in stocks, bonds, private equity, and hedge funds. Electric vehicles, regenerative agriculture, and sustainable aviation fuels enable organizations to become more sustainable.
Municipalities and governments issue bonds for climate change infrastructure. Non-profits are offering market-rate bonds for teachers, firefighters, and veterans. Overall, sustainable investing is an approach that can be applied to any investment type.
It’s a common misconception that investors must sacrifice returns to invest in line with their ideals. With the correct tools and assistance, they can meet financial and sustainable investing goals. With climate conferences in Egypt in November and the UAE next year, sustainability in the region will be under increasing scrutiny.