Sustainable Investing

Oct 27, 2020

Chetan Srivastava, YSEC consultant

Interest in sustainable and socially responsible investing has moved forward by leaps and bounds in the last decade. To make things easier to comprehend, sustainable investing simply means incorporating ESG factors into the decision-making process with respect to investment management. Time and again, it has been proven that integration of ESG data can have a significant impact on returns. Investors are now also aligning their interests with the agenda of doing good for the society as a whole. When ESG concepts were first introduced, they were shrugged off by many pundits on Wall Street. However, when 65% of studies found out that ESG integration and financial performance have a strong positive correlation, the stance of the industry on the subject changed completely.

Key stakeholders want more and more transparency in the investment process, and with Gen-Z and millennials taking over the workforce, companies cannot ignore their greater impact on society. It is expected that in the next two decades, close to $20 trillion in funds will be allocated to ESG based investment strategies. ESG concepts like climate change, human capital, poverty and waste disposal and management are going to be at the heart of these strategies. Now a critical question which needs to be answered is why is there such a sudden increase in interest in sustainable investing? The answer can be broken down into three parts.

First and foremost, investors have started believing that ESG issues most definitely have an impact on the actual performance of a firm – both financially and operationally. Think of companies which cause pollution and have terrible labour practices. Such firms will face operational challenges on a daily basis, like a disgruntled workforce and fines for emissions. These will directly translate into a weak financial outlook. Secondly, institutional investors like pension funds and banks are demanding a higher ESG integration in order to avoid any and all risks associated with issues like climate change and poor human capital. Finally, and perhaps most critically, the youth across the world is pushing for a greener corporate system. These are all good signs, not only for the current generation, but for the generations to come.

Now we need to understand how investors and firms can incorporate these factors into decision making. Negative screening is one such method – it allows investors to root out any companies whose agenda does not align with the greater good of society. Think of fossil fuel or tobacco companies here. Another approach is that through ESG integration, companies/investors can indulge in positive screening. Here, investments are channelized into companies which have a positive impact on the world. Think of a solar power company. A final method is a rather simple one, simply align your goals and invest in companies which focus on ESG themes. Think of companies promoting UN Sustainable Development Goals. This is called thematic investing.

Sustainable investing has quietly made its way into the corporate world and has acquired an irreplaceable position. It is a position which is essential too, as Ban Ki-moon rightly said, “ There is no Plan B, since there is no Planet B”.

References:

Image 1: Mestayer, S. (2018, September 19). So You're Interested in Sustainable Investing? Consider This... Retrieved October 27, 2020, from https://thirtynorth.com/sustainable-investing-considerations-2018/

Image 2: Wallace, K. (2020, February 11). Interested in Sustainable Investing? Here's What You Need to Know About Sustainable Funds. Retrieved October 27, 2020, from https://www.morningstar.com/articles/962827/interested-in-sustainable-investing-heres-what-you-need-to-know-about-sustainable-funds