Sustainable investing, a practice that considers both financial returns and the social and environmental impact of organizations, offers two benefits — earning money and simultaneously supporting good causes. If you’re a student trying to navigate the daunting world of financial markets and you want to be mindful about the impacts of your investments, this sustainable investing guide is for you.
ESG Investing 101
Environmental, Social, and Governance (ESG) investing is a way to support organizations that aim to make the world a better place. It is becoming an increasingly popular investment strategy. Companies that score high in all components of ESG are committed to goals such as decreasing their carbon footprint, advocating for diversity in their executive suite and staff, and driving positive change everywhere, not just in business.
There are multiple financial research agencies, such as MSCI and Sustainalytics, which have online search engines that allow you to find ESG scores for individual companies — but how should you interpret these scores to make investment decisions?
The Varsity sat down with Mikhail Simutin, an associate professor of finance at the Rotman School of Management, who also co-designed a sustainable finance course for undergraduate and masters students at Rotman, to discuss ESG investment tips.
“A consensus rating is probably better than relying on a single data provider,” he advised. Simutin warned that data providers like MSCI and Sustainalytics rate organizations differently, and that students should use their judgement or, if they have access, use a consensus rating to choose what organizations to invest in. Consensus ratings are evaluations of a security firm performed by analysts outside of the company that runs it.
Wadee Shahid, co-president of the Toronto Student Investment Counsel, addressed the misconception that ESG indexes yield low returns compared to other indexes. Shahid explains that ESG indexes can still provide the investor with strong financial gains. “ESG… indexes are able to outperform the market as well,” he told The Varsity.
Green ETFs: a good starting point
Exchange Traded Funds (ETFs) represent a basket of stocks on the stock exchange. ETFs allow you to diversify your investments by letting you invest in smaller shares of many organizations and other assets.
Simutin recommends that novice investors invest in ETFs rather than individual stocks because they are less risky. “[A large group of] stocks are unlikely to fall down together at the same time,” he explained.
Shahid explained that many ETFs take ESG factors into consideration. “There’s a lot of good ETFs out there that track this stuff. And you can see what the ETF is composed of and then you can pick [the one you want to invest in] from there.”
ETFs are cheap to buy and sell, and some investment platforms like Questrade let you buy them without the trading fees that investors usually have to pay for other investments such as stocks and options.
To crypto or not to crypto?
As a novice investor, you may be eager to jump in on the cryptocurrency frenzy. But those who are trying to be mindful of the environmental impacts of their investments should carefully evaluate this investment decision.
Some cryptocurrencies currently pose a threat to the environment by consuming a lot of electricity in the process of crypto mining. Bitcoin alone consumes 0.55 per cent of global electricity production — about as much as some small countries.
“Most cryptocurrencies largely still work on the proof-of-work protocol… and the proof-of-work protocol is, by its very nature, resource intensive because you need to use computation,” Andreas Park, a professor of finance at UTM and the Rotman School of Management, told The Varsity. Proof-of-work protocol is a system that works to secure digital transactions without a third party.
But does this mean that you should avoid investing in all cryptocurrencies? Not necessarily. Keep an eye out for cryptocurrencies that mine on proof-of-stake protocols instead.
Proof-of-stake protocols put the power into the crypto owner’s hands and allow them to mine or validate transactions based on the number of crypto coins that they own. According to Park, proof-of-stake is a more environmentally friendly alternative that requires so much less computational power than proof-of-work mining that it could even be run on smartphones.