Sustainable investing seeks to balance financial profit with social and environmental impact. But is this merely a well-intentioned catchphrase, or is it practically achievable? We think it’s completely possible with the right approach.
Here are 3 ways to balance profit and impact on the path to more sustainable investing.
Use Sophisticated and Responsible Trading Strategies
A butterfly option strategy entails using multiple option positions with different strike prices, but the same expiration date. This creates a profit zone with a limited risk profile. This is particularly useful for more cautious investors, especially when the underlying asset is expected to have low volatility.
There are three reasons why it offers more responsible, resilient, and potentially profitable investing.
- Investing in companies with strong environmental, social, and governance (ESG) practices puts you well on the way to sustainable investing. However, when the butterfly option approach is used to mitigate risk, selected strike prices will more likely align with the investor’s expectations for ESG stock performance.This strategy can help to maximize potential gains while minimizing potential losses. And that contributes to a more resilient investment portfolio.
- When different options contracts are combined, butterfly option spreads require much less capital than the outright buying or selling of options. This is an example of true investment efficiency, which aligns with the underlying principles of sustainable finance.
- Time decay is the term given to describe the rate of change in value to an option’s price as it nears expiration. When time decay is slow, investors can sell the option while it retains value. Butterfly spreads profit if the underlying asset doesn’t move much before the option expires, offering an advantageous time decay benefit to long-term investors.
When looked at all together, this is an investment strategy that can be used for sustainable investments, and which promotes sustainable practices.
Consider Environmental, Social, and Governance (ESG) Factors in Your Investment Choices
All investments carry with them inherent opportunities and risks for the investor. But what of their social responsibility, or their duty to safeguard the world’s natural environments? This is what sustainable investment is all about — evaluating companies based on ESG factors and not just financial prowess.
This means a tempering of the need for high financial returns with social and environmental responsibility.
There are several ways to practice sustainable investment. These include negative or exclusionary screening, positive or best-in-class screening, impact investing, and thematic investing.
Exclusionary Screening
Also called negative screening, exclusionary screening of investments means excluding specific companies or sectors from a fund or portfolio, based on specific criteria.
How can you use this approach to support sustainable investing? You can support sustainable investing by not investing in companies or sectors that do not meet certain ESG criteria.
Greatest-in-Class Screening
Also called positive screening, best-in-class screening entails selecting a subset of top-performing companies for investment, from a defined industry and set of characteristics.
How can you use this approach to practice sustainable investing? You can practice sustainable investing by exercising your corporate social responsibility through savvy investments in companies that meet ESG factors.
Although your own company might not meet specific ESG initiatives’ requirements, you nonetheless contribute by investing in those that do meet them.
Impact Investment
Impact investing describes targeting specific companies or projects to generate a measurable, beneficial social or environmental impact while also generating a positive financial return. This sustainable investment strategy includes different types of asset classes, like stocks, bonds, mutual funds, or even microloans.
Thematic Investing
Thematic investing takes positive screening a step further. It centers around targeting companies or projects that follow specific ESG themes, for example, clean or renewable energy.
Thematic investing allows investors to tailor the way their sustainable investing will affect ESG factors.
Introduce Sustainable Operating Methods
Architectural innovations are essential for minimizing environmental impact. We see this with the approach to sports infrastructure in urban environments. So, too, does a corporation’s architecture impact the environment.
But what of its non-physical architecture? Its enterprise architecture. This framework aligns the corporation’s processes, information, technology, and overall business strategy to achieve its goals. And this architecture can be adapted to balance profit and impact.
How do you do this? Introduce sustainable operating methods and Corporate Social Responsibility (CSR) into everything your business does. The result? Every business action, decision, and investment automatically contributes to sustainability, where the focus is still on profit, but not at the expense of impact.
Your business may become more profitable and your shareholder value may increase. When your company meets ESG and sustainability requirements, you will understand that profitability and sustainability are not mutually exclusive. You can have both.
