The definition of sustainable investing?

This definition of 'sustainability' is widely accepted, and is used by institutions ranging from Aviva to Sarasin. The problem with it, is that its interpretation depends on the perspective of the user and thus in the investment funds world it can incorporate anything from low carbon and green investing, to the way a company is managing itself.

Confusion surrounding the term

The Co-operative Investment range, for example, has eight sustainable investment themes, one of which is 'sustainability' itself. In this case 'sustainable' included social, ethical and environmental concerns, whereas 'sustainability' referred only to Corporate Social Responsibility. Funds use different methods of analysis, with some such as Sarasin using a 'sustainability matrix', taking certain issues into account and weighing them against each other. There are funds that actively screen for sustainable companies, and others that negatively screen against those they deem unsustainable.

Many companies also have 'sustainability' programs, often falling under their Corporate Social Responsibility (CSR) mandates. An example of this is Procter and Gamble, who produce an annual report [PDF 4.92MB] on their sustainability practices. Responding to consumer and investor demand, companies are increasing their CSR schemes to improve their brand image, but institutions define 'sustainability' in the way most convenient to them, and it sometimes seems as if the definition is an afterthought rather than being a specific goal to achieve.

Sustainability is sometimes defined as increased responsibility, and 'sustainable investment' is often linked with the UN Principles of Responsible Investment. Set up in 2005, they include environmental, social and corporate governance issues (ESG) and now have 850 signatories, including First State, Schroders and Sarasin. The term can also be defined by the sub-themes it contains such as: water, energy efficiency and waste, some of the themes listed by Guardian Sustainable Business. These sub-themes can be completely different from fund to fund, and some highlighted as sustainable by some, are considered unsustainable by others such as natural gas, nuclear energy and transport.

It seems that 'sustainability' as it is used by investment funds is too wide in scope to be used as a differentiator of investment funds. It is closely related with 'green', 'responsible' and 'environmental' investment themes, because the term more naturally fits into these areas. However, we should not forget that for a person who does not accept the science behind global warming coal might be deemed a sustainable business. There are estimated to be over 847 billion tonnes of coal reserves, enough according to the World Coal Association, for another 130 years at current usage rates. Of course to the scientific community the implications could be catastrophic and thus to many unsustainable.
   

Worldwise Investor's approach

At Worldwise Investor to avoid confusion we do not use the term 'sustainable' to describe a category of funds. In part because it is possible if we defined a sustainable fund in too narrow a manner that an investment fund with the title in its name would fall outside our definition. This would be unhelpful to both investors and advisers. We still feel however that the term as defined by the UN is useful, but you should be aware that in using this term, we do accept the scientific consensus on climate change and do not view coal as a 'sustainable' industry.

It is very difficult for a fund manager to identify companies and areas for investment which fit 100% into the 'sustainable' definition, but it is possible to use the term in describing various aspects of a company's activities, or procedures. We should not forget that the central cog to business sustainability is long term financial viability i.e. the business makes a profit.

In conclusion an investor should be aware that when an investment fund uses the term 'sustainable' it is an indication of general intent by the fund manager, but not of practice. The term has no universally understood meaning within the investment arena. Investors still need to look behind this word to understand what the investment fund is actually doing.