What You Need to Know About ESG Investing For Sustainable Businesses
Many companies used to overlook the impact of sustainability factors on the financial outcomes of a company — it was a misconception that sustainability meant sacrificing your rate of return. Today, business owners, investors, and CFOs can tell you that sustainability creates long-term profitability. Improving your sustainability factors lets you affect a positive change in the world while achieving better financial results.
Cindy Bohlen was also unaware of the link between sustainability and business finances. Her journey and work as a sustainable business investor showed her that focusing on your environmental and social impact doesn't hurt your business. She shares how budding companies and mission-driven business owners can make small changes to be sustainable and profitable.
Proving That Sustainability Profits
Many people in the field of business — including CFAs like Cindy — didn't initially consider the impact of sustainability on profitability. When Cindy began work as a startup sustainable investment advisor, she delved into proof that investing in sustainable companies works. She found her answer by looking at the MSCI Socially Responsible Index Return compared to the S&P 500. It was all she needed to get involved in sustainable business.
Sustainable investing began with nonprofit thought leaders aligning their mission with their investments. Cindy shares: “They were achieving market returns but also aligning their mission with their investments. That was really the key for me because today, I believe that that’s the goal of all investors who are looking for sustainable investment options. They’re looking to align their investments with their values.”
Cindy joined Riverwater Partners as their sustainable investment advisor. She has a strong belief in being able to make the world a better place while having a high rate of return.
The Forms of ESG Investing
ESG investing is a continuum. On one end, businesses maximize profit. The other end focuses on impact.
One of the most basic forms of investing is exclusionary screening. Companies deemed harmful to society are often excluded.
On this part of the spectrum, investors consider more ESG factors. They would look at better business policies and practices that can result in better performance.
ESG or Sustainability Stewardship
Here, asset managers collaborate with the companies. Together, they work to improve their ESG policies and practice to generate more positive impact and better outcomes.
Thematic investing includes investments in companies dedicated to causes like clean energy, climate change, and gender stances specifically, in addition to other types of ESG.
In impact investing, investors are willing to accept a slightly below market rate of return. More focused on what they can do, people aim to achieve a positive social or environmental impact.
At the end of the continuum, charities focus their money on doing good without expecting financial returns.
Riverwater Partners falls on a broad range of the continuum of investing. They practice exclusionary screening, ESG integration, and sustainability stewardship. What makes them unique is their role in education about sustainability and providing tools for policy formulation practice and reports. They talk to 200 companies yearly about their businesses to find who fits in with their investment criteria.
Sustainability for Better Business Outcomes
How do you know if your business improved its outcomes? Stock price and financial metrics are often evaluated by profitability per stockholder share. As an investor or business owner, you want to see your company's earnings grow as your stock price rises.
A lot of factors can affect the stock price and financial performance. Cindy believes that: “there is evidence to suggest this: that companies that really consider both the risks and opportunities presented by these sustainability or ESG factors have an important part in a company's profitability, and then stock appreciation over time.”
Proof and multiple studies have shown that a company's focus on sustainability factors and their impact can reduce risks many businesses face. Benefits include:
Improvement of a company’s operating margins
Better stock price
This link between sustainability and performance shows that ESG factors have a meaningful impact on profitability.
Evaluating and Investing
Riverwater Partners uses its three pillars of sustainability to evaluate the risk and opportunity with the companies they invest in.
Investors should do their due diligence to understand a company's focus on sustainability factors. Cindy and Riverwater use their proprietary scoring system to assess the environmental, social, and governance factors a company affects. Each score is weighed based on the company's industry to account for specific factors being more relevant to that company. These factors can provide insight into the risk and opportunity with a company.
Engagement and Collaboration
These last two pillars underline the work done together to improve different aspects of the company that have more impact. Riverwater has a collaborative approach as active investors.
Engaging and collaborating means they educate and provide tools. They work alongside business owners and other shareholders to improve sustainability, which, in turn, increases profitability over time.
Making Your Business Sustainable
Unfortunately, it's easy to make mistakes that can lead to loss of profit. As you start your entrepreneurial journey, focus on the salient sustainability factors of your business. A materiality assessment can gauge what your stakeholders believe are the most important to focus on, which can benefit both the people and your company and tells you what impactful factors you can improve.
For example, a service-focused company would be better off focusing on its social impact and company culture rather than its environmental one. Cindy advises: “that companies start where they are, and take it on in the bites that they can effectively do. That's how we think you create the best chance of a focus on this, resulting in the best outcomes.”
A CFO’s Key Role in a Business’ Positive Impact
An excellent CFO understands the different aspects of a business and translates that into numbers. As Cindy shares: “A strong CFO is a key member of a solid C suite. And while on the surface, it may seem that a CFO's only role is to crunch the numbers, you have to remember that the numbers are simply telling the story of what has transpired in the business.”
People in business now understand the risks and opportunities of ESG factors in their financials. A sustainable business is a business that endures. As a woman in business aiming for sustainability, you also need to ensure that it is profitable. A company willing to make incremental changes as the world changes can become sustainable little by little.
CEOs and CFOs often work together to discuss what impacts a business and how that translates into numbers. A CFO's valuable input creates a strategy to develop the best business practices with the best financial results.
How You, A Woman in Business, Promote Sustainability
Riverwater is a full-service registered investment advisor. They offer wealth management, institutional advisory work, and asset management. As long-term investors, they work on a company's impact and reevaluate them through the lens of sustainability.
As a business owner and a person living in the world, you can promote sustainability. Consider how you affect the planet. Align your investments and learn more about sustainability and profit for your business.
Curious about Cindy and her work at Riverwater Partners? Visit their website to learn about ESG investing, access resources, and more. You can connect with Cindy Bohlen on LinkedIn or send her an email.
If you want to grow your team to take your business to the next level, a CFO can help you figure out your next best move. Understand how to price fairly yet competitively and maximize your profits with the help of a finance team. Schedule a discovery call with Profit Reimagined™ to help you cover your foundations and deepen your understanding of these concepts.