Over the last few years, everything has suddenly become about sustainability. Although it’s often viewed through the lens of environmental, social, and governance (ESG) practices, sustainability is a complex and nuanced concept that looks beyond the current system and imagines a better future for subsequent generations.
What is sustainability?
Put simply, sustainability is the practice of ensuring the future generations have the resources to do as well as (if not better than) current ones. Sustainability, however, is about more than sacrifice; it also ensures that the quality of life of a current generation isn’t harmed.
Although sustainability is most commonly linked to the transition to a carbon-free energy future, it encompasses a wide variety of critical issues, ranging from how we grow the food that we eat and protect the water that we drink to how we ensure that people of all races, ethnicities, genders, and creeds are given opportunities to participate and thrive in society.
Types of sustainability
Sustainability has three basic elements: environmental, economic, and social.
Environmental sustainability involves using renewable resources. For example, Solar, wind, hydro, and geothermal energy are considered to be renewable resources and, therefore, sustainable. Since oil, natural gas, and coal deposits deplete, they’re not considered to be renewable and, as a result, not sustainable.
But environmental sustainability doesn’t just involve using resources; it can entail saving resources. The modern environmental movement has its roots in a massive 1969 oil spill off the coast of Santa Barbara, California, that led to a decade of laws aimed at making the environment more sustainable, such as the National Environmental Policy Act (1970), Clean Water Act (1972), Clean Air Act amendments (1977), and the Alaska National Interest Lands Conservation Act (1980).
These days, environmental sustainability is focused on saving the biggest resource of all: the planet. As the financial toll from climate change mounts, more businesses are taking steps to ensure their operations are environmentally sustainable and preserve resources for future generations.
Economic sustainability is often linked to environmental sustainability, largely because of the vital role that energy -- in this case, energy derived from fossil fuels -- plays in the economy. But economic sustainability covers a wide swath of activities, including everything from taking steps to curb the effects of poverty to ensuring that the gap between rich and poor doesn’t spiral out of control.
Of the three major elements of sustainability, economic sustainability may be the most problematic, simply because capitalist economies rely on growth to improve lives. And as the global economy is currently structured, the only way to spur economic growth involves using more energy, the majority of which is not environmentally sustainable.
Societal sustainability is often lost in the overall sustainability discussion because it’s easier to quantify environmental and economic costs and opportunities. But without societal sustainability, neither environmental nor economic sustainability is possible over the long run. Societal sustainability is more than multigenerational stability guaranteed by equality of treatment for all genders, races, cultures, or creeds; it involves all facets of human existence.
Put simply, societal sustainability can be defined as focusing on the health and well-being of people and communities. The World Bank defines societal sustainability somewhat more narrowly, emphasizing the role of inclusive and accountable governments, as well as equality of opportunity for everyone.
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Profiting from sustainability
From an investment standpoint, sustainability might sound like a losing proposition since it’s certainly not business as usual. Still, funds that emphasize sustainability are doing better than you might think. An S&P Global Market Intelligence study found that 16 of 27 ESG exchange-traded funds (ETFs) outperformed the S&P 500 in early 2021.
The benefits of investing in sustainability continued into 2022. The Morningstar U.S. Sustainability Index fell 18.9% in 2022 -- but that was better than the Morningstar U.S. Large-Mid Cap Index, which dropped 19.5%, or the S&P 500, which plunged 19.4%.
Investors who are interested in sustainable opportunities need to be diligent. Just because a company or fund claims to be sustainable doesn’t necessarily make it so. Greenwashing is common and often quite shameless. For example, BP, an oil and gas supermajor, drew criticism for claiming to be “Beyond Petroleum” while its production figures clearly indicated otherwise. People interested in sustainable opportunities should do their homework before jumping into an investment.
