Evaluating sustainable investments

When seeking out potential sustainable investment opportunities, it is key to be able to separate the wheat from the chaff. 

As sustainable investing has gained in popularity, so too, has the number of companies and organizations eager to play up the sustainable attributes of their business or investment opportunities. 

This tactic can take many forms and is sometimes known as greenwashing, social-washing, rainbow-washing or Environmental, Social, and Governance (ESG) competence-washing.  

Examples of “washing” include omission of material information, provision of misleading information, and over-exaggeration of sustainable aspects of a business or investment strategy, among others. 

These declarations, often unsubstantiated or misleading, can make investors feel skeptical about investing in sustainable strategies. 

Recent research by the Association of Investment Companies’ ESG Attitudes Tracker found that 63% of surveyed private investors were concerned about greenwashing in 2023, up from 48% in 2021.1 Hence, holistic evaluation with a balance of both breadth and depth is critical to mitigate greenwashing risks. 

How can an investor start the evaluation process? 

 

First, it is important to seek transparency about the potential opportunities. 

Be wary of poorly defined, or generally vague ESG-related terms, policies and promises, especially when the financial and ESG-related returns and impacts sound too good to be true. Be mindful of any vague assurances that might be offered, instead of verifiable and empirical answers to questions.

When evaluating a company, scrutinize two main components – the “what,” and the “how”. 

Ensure that companies in an investment portfolio who peddle themselves as “sustainable” are transparent about the following tenets:

1. What a company does

For companies in inherently sustainability-linked sectors such as healthcare, one might feel compelled to label the business as “sustainable”. However, this might not be the case after looking deeper into what products or services they offer. 

For example, while companies that offer access to affordable quality healthcare services to underserved communities fall under the scope of sustainable investing, those that focus purely on cosmetic procedures, do not.

2. How a company does it 

Businesses that are committed to strong sustainability practices identify quantifiable ESG factors that impact their business and stakeholders, as well as develop a risk mitigation plan and set ambitious targets for growth and improvement. Often, these companies also assess the day-to-day impact of their operations on the environment and community and take actions to prevent any negative impacts.

Going beyond standard disclosures

 

One tool to evaluate portfolio companies is their ESG scores. While exact ESG rating methodologies differ among rating bureaus, the most comprehensive usually measure a company’s performance on and management of material ESG risks, opportunities, and impacts, informed by a combination of company disclosures, media and stakeholder evaluation, modeling approaches and business engagement.2

This is a great starting point of reference, though it may not paint a full picture of a company’s overall sustainability attributes. 

There are over 600 ESG ratings agencies and data providers globally3, each with its own methodology. 

This complicates attempts to make standardized comparisons between companies based on ESG scores alone. When selecting data providers, consider how exactly the ESG scores are derived, calculated, and aggregated. Moreover, assess whether the scores and data accurately reflect specific sustainable investing objectives.

Note that what may be seen as “washing” to one organization or investor may be different from another depending on their objectives. Questions to consider include: 

  1. How does the company or investment firm define sustainability? 

  2. How is sustainability incorporated in the portfolio construction and investment decision process?

  3. What is the exposure threshold set for exclusionary and/or thematic approaches?

  4. For impact investments, is there proof of intentional, measurable, and incremental positive change?

  5. Are any sustainability factors favored over others? Are there any compromised factors that have been ignored or sidelined?

  6. What is the company’s record in proxy voting and active ESG-related stewardship?

Finally, investors should not let their guard down after making their investments. Continually review how the organization or investment manager monitors and reports their progress against their sustainability objectives, to ensure that the investment strategy remains aligned with intended goals.

KEY TAKEAWAYS:

 

Be wary of green and other ESG-related acts of “washing”. Due diligence, both broad in scope and granular in detail, is imperative in evaluating a company’s commitment to and success of sustainability-related initiatives.


Delve into the “what” and “how” of a company to assess its commitment to sustainability.


ESG scores are a great starting point to assess a company’s ESG commitment and competency but cannot paint a complete picture. A holistic fundamental review of a company is necessary for that.


An investor should ask targeted questions and work with their advisor to obtain accurate and material information about a strategy or company to ensure the opportunities are aligned with both sustainability and financial goals.