Aug 07, 2020  | Tags: sustainability, sustainable investing

Our Insights

Sustainable investing has been accelerating into the mainstream. As COVID-19 plays out, and in the wake of recent political, environmental and social events, a growing amount of people are wanting to focus on investments that also reflect their personal values and beliefs.

But how do you know if a company is sustainable? Sustainable investing is still being developed and refined. Some aspects of ‘sustainability’ can difficult to measure quantitatively, and some data can’t be instantly obtained.

However, there are different frameworks you can adopt and performance indicators that can underpin your strategy, or that you can use to help you evaluate a company before investing.

Sustainable factors to consider

When evaluating the sustainability of a company, you should be looking at its position on issues within three key areas: environment, social and governance (ESG). Consider its stance and strategy on tackling major global issues such as climate change, child labour, equality, justice, salary disparity and corruption. Are there any particularly positive or negative connections towards environmental, governance or social sustainability issues?

Performance indicators 

There are a number of sustainability performance indictors you can evaluate over the course of a company’s entire ‘product life cycle’.

When assessing these factors and performance indicators, you also need to ask whether their practices are sustainable and adaptable for the long-term.

Environmental

Environmental indicators are key within an organisation and should be implemented at every step, from the manufacturing to final product. You should evaluate a company on aspects such as:

• greenhouse gas emissions
• energy consumption
• water consumption
• waste output and management
• pollution mitigation
• material usage, and
• compliance with environmental laws

Evaluate whether the company is taking steps to combat environmental issues by using safe waste disposal, renewable energy sources and recyclable and reusable materials. It’s also worth looking at the impact they're having on protected habitats and species. 

Social

Social sustainability encompasses both a company’s internal network, such as their employees, and their customers or the wider community.  

Within the workplace, areas such as their policies, diversity and human rights should be explored. A company’s labour standards, production and supply chain management are critical, particularly at the beginning of the product life cycle. Ask questions on their safety management, their regulations for protecting employees or even if there are an abnormally high amount of accidents in the workplace.

When you shift the focus to consumers and the broader community, elements like product safety, customer privacy and overall community impact come into play.

Governance

Sustainable governance indicators are effective in showcasing the transparency and connectivity of a company between its shareholders, board, consumers, and other stakeholders. They should also reveal any corruption or bribery at the company, and actions taken to ensure equality, fairness and efficiency.

A lot of the metrics will revolve around the board of a company, including its structure, composition and oversight of policies and strategic sustainability. Other metrics will consider shareholder rights, responsiveness to investors and salary disparity.

How to measure overall sustainability

So how do you go about the actual ‘scoring’ or measuring of a company’s overall sustainability?

Many sustainability approaches include or exclude companies based on positive and negative screenings of their environmental, social and governance practices.

But while this is effective in identifying the favourable companies, it can be flawed in that it sometimes unfairly excludes a company based on a ‘minor infraction’ or even their industry. For example, while a specific company may have sound environmental policies and practices, the overall industry it falls under may be considered detrimental to the environment, and therefore it is excluded.

So, it’s recommended that investors instead score businesses along a spectrum, where their sustainability metrics are rated and compared to similar companies. Once these scores have been evaluated, additional screening processes can then be applied to further filter through your options.

But what about accountability?

Ensuring the accountability of a company is huge, and investors need to be aware of the ‘knowing vs doing’ gap that is starting to emerge. This gap refers to the amount of companies who are ‘aware’ of the need for sustainability versus those who actually implement sustainable practices.

But this isn’t the only issue. While companies may claim to be sustainable, you’ll need to dig deeper to find out whether the protocols are actually being carried out and properly. As we’ve already discussed, transparency within a company is crucial - if there is full transparency on operations and policies, you can be more confident that you’ve secured the right investment for you.

Where to source the information

Securing all the information you need will likely require help from your financial adviser along with people and businesses who can provide you with research and quantitative data on a company’s business practices.

However, there are also plenty of resources you can use to kick off your evaluations. These include:

• Annual reports
• Corporate responsibility reports
• Sustainable reports
• Mission statements
• Company profile
• Additional company resources

Several sustainability metrics will often be simple yes or no questions – such as whether they have a particular policy or use renewable energy sources – which can generally be found in the above sources.

Finally, organizations like Global Reporting Initiative (GRI) and Principles for Responsible Investment (PRI) are also trustworthy sources that have pioneered several sustainability screenings.

Get Advice

Sustainable investing can be tricky, but you're in the right place.

CWM specialises in sustainable investment and our team can set you up with the right strategy, and also help you evaluate and make decisions that will help you do well and do good.

Talk to the team at Calder Wealth Management. Call us on (08) 8373 3333 to schedule your free initial appointment.

Written by Anthony Hill at Calder Wealth Management.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.