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Sustainable Investing: What It Could Mean for Your Portfolio

Photo of author, Monica Garver, CPA, CFP®, AIFA®, CDFA®.
Monica Garver, CPA, CFP®, AIFA®, CDFA®
Director of Retirement Plan Services and Financial Strategist

What is Sustainable Investing?

To start let’s define sustainable investing:

Sustainable investing combines traditional security analysis with environmental, social and governance (ESG) insights. ESG was coined in 2005 by the United Nations in a Report entitled “Who Cares Wins” and instituted the Six Principles for Responsible Investing, or PRI.

The United Nations created Ten Principles of the UN Global Compact with the 10th principle being added on June 24, 2004. They are as follows:

Corporate sustainability starts with a company’s value system and a principles-based approach to doing business. This means operating in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labour, environment and anti-corruption. Responsible businesses enact the same values and principles wherever they have a presence, and know that good practices in one area do not offset harm in another. By incorporating the Ten Principles of the UN Global Compact into strategies, policies and procedures, and establishing a culture of integrity, companies are not only upholding their basic responsibilities to people and planet, but also setting the stage for long-term success.

The Ten Principles of the UN Global Compact are derived from the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption.

Human Rights

Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights

Principle 2: Make sure that they are not complicit in human rights abuses

Labour

Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining

Principle 4: the elimination of all forms of forced and compulsory labour

Principle 5: the effective abolition of child labour

Principle 6: the elimination of discrimination in respect of employment and occupation

Environment

Principle 7: Businesses should support a precautionary approach to environmental challenges

Principle 8: undertake initiatives to promote greater environmental responsibility

Principle 9: encourage the development and diffusion of environmentally friendly technologies

Anti-Corruption

Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery


What is ESG?

Sustainable investing is the umbrella category of investment strategies. ESG describes the metrics that drive sustainable security selection:

  • Environmental – climate change, natural resource use, pollution & waste, Clean tech
  • Social – human capital, product liability, data privacy, health & safety
  • Governance – accounting practices, ownership & control, Board independence, ethics

ESG investing refers to the practice of evaluating and selecting companies or funds based on their business practices, with the goal of identifying risks and opportunities related to ESG that may not be considered by traditional financial analysis.

To learn more about implementing an ESG investment strategy, please watch this video and discuss the opportunity with your advisor.

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