As climate change and other sustainability issues have climbed up society’s agenda in recent years, companies are increasingly under pressure to demonstrate that they are playing their part in tackling—or at least not significantly contributing to—these problems.
By investing in and purchasing from companies that are helping to tackle these issues, investors and consumers can play a key role in holding companies to account for their social and environmental performance. In this article, we break down five key terms that socially and environmentally conscious investors and consumers should understand in order to spend and invest in a manner that reflects their values.
1. Corporate social responsibility (“CSR”)
Corporate social responsibility is the broad concept that businesses have a responsibility to the environment and communities in which they operate; in fact, many large companies have entire departments dedicated to CSR. They may organise volunteering opportunities for employees, donate to charitable causes or offer discounted products or services to disadvantaged groups. Companies who invest in CSR can benefit the broader community, boost their brand image and give employees interesting and rewarding additional opportunities. These factors, in turn, may help to drive more business to CSR-focused companies (which makes them attractive investment opportunities) while also benefiting the communities around them.
2. Impact investing
Impact investing is an investment strategy that aims to invest in companies that will generate both a financial return but also a social or environmental impact. As an individual, it is possible to pursue an impact-led strategy by either investing in “impact funds”, which are run by impact-driven fund managers, or by selecting impactful investments yourself. Being an impact investor isn’t only about buying stocks and shares; there are other types of investment such as peer-to-peer lending where you could provide funds to a micro-finance company who lends small amounts to start-up businesses or individuals in less economically developed nations.
3. Triple bottom line
A company’s bottom line refers to their profit (as this is the last line on a statement of profit or loss). The concept of triple bottom line refers to the combination of the company’s economic performance (profit) as well as how socially (people) and environmentally (planet) responsible the company is. These three “Ps”—people, planet and profit—aim to provide a measure of the total impact of the company’s activities and take into account a broader range of stakeholders rather than just the company’s shareholders.
4. Environmental, social and governance investing
As we explored in this article, environmental, social and governance (“ESG") investing is all about directing funds towards companies that offer better outcomes for the environment, social issues or governance issues. ESG is incredibly broad and alongside headline issues, such as climate change, it also includes corruption, poor employment practices and supply chain problems. By considering ESG criteria, investors can better understand how exposed a company is to ESG risks and how well the company can manage these risks. For example, a company situated in a country rife with corruption is likely to have a lower ESG rating; this won’t necessarily prevent an investor from investing in such a company, but it will impact their assessment of the company’s prospects.
Greenwashing is when companies deceive consumers and investors by making claims that their products or business as a whole are more environmentally friendly than they really are. Greenwashing can take place at a product level—for example, by claiming that a product is recyclable when in fact only part of it is—or at the corporate level. At the corporate level, an example of greenwashing is a company publishing misleading data about its environmental impact. It can be very difficult for consumers and investors to identify greenwashing but the issue is gaining traction in the media so it’s certainly something that green-oriented investors should be aware of.
The topics discussed in this article are just some of the issues that socially- and environmentally-focused investors should be aware of. This is a rapidly growing space–and it needs to be if society is going to meet the challenge posed by climate change, rising inequality and resource scarcity–so if you are interested in these topics, this is certainly a space worth watching.