Sustainability is a topic that continues to gain momentum with investors and corporations. As the impact of businesses becomes more visible due to advances in technology, data-driven research, and social media, a heightened awareness of how companies operate continues to surface.
Ethical investment is one way for large institutions to ensure that their funds do not support companies that are harmful to humanity or the environment.
But it isn’t so simple as investors must first understand how various sustainability factors impact an investment opportunity’s long-term value.
Let’s take a look at some of these factors:
Ethical investors are particularly sensitive to workers’ treatment and compliance with local HR laws within each company. If a company has a poor record in this area, it could face costly litigation, which could compromise ethical investors’ portfolios.
As such, socially responsible investors often include a clause in their investment contracts to require a company to adhere to a code of conduct in respect of employees. This could include requirements to provide a living wage and benefits, maintain safe working conditions, and respect the right to organise and bargain collectively.
There are some indices that investors can use to gauge how a company treats its employees and its supply chain workers, such as the Corporate Human Rights Benchmark (CHRB) and the RepRisk. These indices provide information on the compliance of a company’s operations with human rights law.
Investors in sustainable companies often look for companies with a strong commitment to reducing their carbon footprint.
For example, a company that manufactures renewable energy products could be a particularly attractive investment opportunity if it has plans to grow in the market. This would give investors the potential for above-average returns as the demand for these products grows.
Investors in sustainable companies often look at the company’s culture and governance practices. While each company has its own approach, some factors that investors may consider include:
- The composition of the board of directors. – Practices in selecting executives, such as promoting from within and the ability to groom new leadership.
- The amount of money being spent on research and development. – The company’s record is distributing profits to shareholders and repaying debt.
- Strong governance practices and a track record of investing in profitable growth – A company with a strong commitment to sustainability could have a competitive advantage in attracting top talent, particularly employees who care about the impact of their work.
Supply chain management can be a big part of a company’s sustainability efforts. It can play a role in determining the environmental footprint and social implications of a company’s products, services, and operations.
Therefore, investors may consider how a company manages its supply chain, including its approach to ethical sourcing and its efforts to minimise the risk of unethical practices.
Now that you know the factors ethical investors consider when measuring sustainability and human impact, you may be interested in considering ethical investment options for your portfolio.
With so many industries relying on harmful practices, there is an abundance of opportunities to find companies that operate ethically.