There are various categories of sustainable investing. They include impact investing, socially responsible (SRI) investing, ESG investing and values-based investing. 

ESG stands for Environmental, Social and Governance. ESG factors or sustainability factors, when integrated into investment analysis, will help investors to identify companies with superior business models that offer potential long-term performance advantages. 

All the three ESG sustainability factors have become very relevant in today’s world. Environment is every one’s concern. We are already facing the adverse consequences of global warming in the form of extreme weather, sea level rise, floods, droughts etc in our everyday life. A recent study by the scientists of Climate Central, a science organization based in New Jersey, says that rising seas will erase more cities by 2050. There are some 150 million people who are now living in such cities which will go below the high-tide line by then.

Businesses that have a negative impact on air, land, water, ecosystems and human health are not sustainable in the long run. The recently launched IPO of global energy giant Saudi Aramco has received a tepid response from the international investors due to environmental concerns. Foreign investors were concerned that there will be a shift away from consumption of fossil fuels to green energy in the next two decades, in view of climate change worries. Saudi Aramco is the most profitable company in the world. It earned a net profit of $ 111 billion in 2018, compared to a net profit of $ 59 billion earned by Apple Inc in the same year. Yet, the international investors have not responded enthusiastically to the IPO of Saudi Aramco, as its product crude oil contributes to carbon footprint.

Social concerns refer to the adverse impact that companies can have on society in terms of  health, safety and human rights. Companies that produce or sell tobacco related products are one such example. It is well documented that consumption of tobacco related products is highly harmful to human health. Such businesses can not sustain in the long run, as people realize the harmful effects of such products. 

Governance concerns are about the way companies are run. Governance issues relate to areas such as board independence, gender diversity, corporate risk management, integrity of accounts, related party transactions, excessive executive compensation, interests of minority shareholders etc. 

Governance positive actions include aligning the interests of share-owners and management, avoiding unpleasant financial surprises, increasing accountability of the board, ensuring better diversity in the manpower, transparent reporting & disclosures and protecting the rights of minority shareholders. In recent times, many companies in India and elsewhere, with negative governance practices have received a thumbs-down from the investors. The share prices of such companies are quoting at a fraction of their past prices.

ESG investing looks at “extra-financial” variables or factors. Responsible investors evaluate companies using ESG criteria as a framework to screen investments or to assess risks in investment decision-making.

According to Gitterman Wealth Management, “A successful ESG money manager typically engages in the following strategy: First, he will identify a set of compelling investments, based on his traditional investment selection criteria. Subsequent to doing so, he will apply an ESG lens to this set of viable investments. Last, but not least, he selects those investments that are anticipated to generate a scalable, profitable impact. The reason why impact and returns need not be mutually exclusive is because the ESG lens is only applied to profitable investments that have been identified pre-lens.”