Introduction
Today we will analyze one of the most contemporary and dynamic subjects – sustainable investments. Green investing or Sustainable investing (sometimes known as ethical investing, socially responsible investing or impact investing), is multidimensional but still focuses on financial performance. Incorporating the environmental, social and governance (ESG) standards into the investment process implies the implementation of numerous activities, including consideration of socio-environmental consequences and financial goals recognition, for achieving positive results for society and environment.
The constant rise of importance of this concept in recent years is one of the main features that can be noticed thanks to a few factors. One is that people are starting to be aware of the looming global crisis in the environmental, and social spheres. Sustainability-related topics including climate change, resource depletion, class struggles and corporate governance shortcomings are increasingly becoming serious concerns for several investors, policymakers as well as the general public. The rising demand for investment strategies that are, not only, financially effective but also deal with these key problems and promote sustainable development has been the principal response.
Sustainable investing also progresses rapidly on the basis of a major change in society’s norms and preferences. Generation Z and the millennials, who dominate this demographic in the marketplace, increasingly look for the aspects of green living and moral commitment. As this demographic increases in affluence and power within the capital marketplace, their choices and tastes are influencing the way the investment industry is being shaped and, consequently, how sustainable investing is accepted as one of the investment practices.
Additionally, ignoring sustainable approaches is not only immoral but also there are many indications that investing sustainably makes good financial sense. There is much research confirming that a firm with a strong ESG performance is more likely to bring in more benefits to investors over time than those who do not have a strong one. They usually have less volatile patterns, stronger resilience to down market trends, and are more successful in the financial field.
The scope of sustainable investing is broad and encompasses a wide range of asset classes, including equities, fixed income, real estate, and alternative investments. It’s not limited to any particular sector or geography but rather covers different industries and regions.
Ultimately, the motivations behind sustainable investing deal with ethical considerations, risk management, long-term value creation, regulatory compliance, and client demand, among others. By integrating sustainability principles into investment decision-making, investors have the opportunity to drive positive change, mitigate risks, and capture emerging opportunities in the evolving global economy.
STRATEGIES
Generally there are many different strategies for sustainable investing. The most commonly used sustainable investment strategies include: negative screening, positive screening, ESG integration and impact investing.
Negative and positive screening, as the names suggests, refer to methods of inclusion or exclusion of potential investments based on ethical viewpoints or values proposed by the companies.
There are many ways investors can base their decisions with various criterias in order to filter companies that either meet or don’t meet their ideas.
For example investors can choose to exclude certain industries like tobacco, alcol and gun makers from their portfolio, or when investing in a certain industry they can choose to exclude the higher polluting company (negative screening) or select the lowest polluting one (positive screening).
Eurosif (European Sustainable Investment Forum) defines ESG integration as “…. the explicit inclusion by asset managers of ESG risks and opportunities into traditional financial analysis and investment decisions based on a systematic process and appropriate research sources….”. Eurosif divides the activities performed by asset managers into three categories: Category 1 (“nonsystematic ESG Integration”): ESG research and analyses made available to mainstream analysts and fund managers; Category 2: Systematic consideration/inclusion of ESG research/analyses in financial ratings/valuations by analysts and fund managers; Category 3: Mandatory investment constraints based on financial ratings/valuations derived from ESG research/analyses (exclusions, under-weighting, and etc.).
Eurosif only considers categories 2 and 3 to be consistent with its definition of ESG integration.
Incorporating ESG factors in investment strategies has become an important service for many providers of investment services. This new approach focuses on several non-financial dimensions of a stock’s performance, including the impact of the company on the environment, a social dimension, governance and ethics viewpoints.
For each of these dimensions, information on the firm’s practices are collected and analyzed in order to better understand how companies act in these dimensions. The outcomes of these analyses are used by a portfolio manager to construct a diversified portfolio.
This usually is structured to meet minimum standards with respect to the chosen dimensions.
ESG investing relies on the belief that both investors and society can benefit by including ESG information.
This view is very well expressed in Shiller who discusses the important role of financial markets in supporting activities in society.
Impact Investing is an investment strategy that aims to create specific beneficial social or environmental effects, additionally to financial gains, and it’s often considered as a extension of philanthropy
The point of impact investing is to use money and investment capital for positive social results and it can take the form of numerous asset classes and may result in many specific outcomes.
Investors who use impact investing as their strategy need to consider a company’s commitment to corporate social responsibility (CSR) or the sense of duty to positively help society as a whole, before they become involved with that company.
The type of impact that can evolve from impact investing can vary based on the industry and the specific company, but some common examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices to help save our planet.
Author: Simona Merlo and Luca Sesena