Sustainable Investing and Key Trends
Sustainability, as defined by the United Nations, involves meeting the current needs, without compromising the ability of future generations to meet their own needs. Sustainable investing is often referred to as socially responsible investing (SRI), ethical investing, or Environmental, Social, and Governance (ESG) investing. Sustainable investing is an approach that seeks to generate financial returns while also creating a positive social or environmental impact. This investment strategy integrates ESG factors into investment decisions to better manage risk and generate sustainable, long-term returns.
The first SRI mutual fund, the Pax World Fund, was created in 1971, and it avoided investments in companies producing weapons and tobacco or those involved in the Vietnam War. During the 1980s, investors increasingly pressured companies to divest from South Africa due to their apartheid system. The ESG framework took form in the early 2000s, and it has gained significant traction with both institutional and individual investors. Today, sustainable investing has become mainstream as a growing number of investors seek to align their portfolios with their values. According to the Global Sustainable Investment Alliance (GSIA), global sustainable investment AUM reached $30.3 trillion in 2022.
Many companies are realizing the importance of making investments that benefit the environment, society, and the company itself. This entails considering factors such as a company’s environmental impact, treatment of employees, and management practices. When companies prioritize these considerations, they not only contribute positively to the world, but it will also benefit themselves and their shareholders. Moreover, investors are increasingly using their influence to drive positive change in corporate behavior through engagement and shareholder activism.
Measuring impact is essential since investors need this information to evaluate their investments and determine if their investments have had the desired impact. The availability and quality of ESG data have improved significantly over the past decade. However, challenges remain, and investors often face difficulties in obtaining consistent, comparable, and reliable ESG data. A more harmonized regulatory framework will make ESG metrics more comparable, and regulators, investors and NGOs all have an important role to play in developing a common framework.
Improved and more harmonized ESG reporting standards will also help combat greenwashing which is when companies or investment managers mislead consumers or investors about the impact of their products to capitalize on the growing demand for sustainable products.
Increasing integration of ESG factors into mainstream investing is a key trend in sustainable investing and risk and investment opportunities related to climate change as well as the transition to a low-carbon economy are becoming increasingly important. Companies that fail to adapt to a low-carbon economy may face regulatory risks, increased operational costs, and reputational damage, while successful companies will create value to investors. Another trend is the growth of green bonds which plays an important role in funding the transition to a sustainable economy.
Chart 1 Climate Bonds – Yearly Issuance
Source: Climate Bonds Initiative
In conclusion, sustainable investing will probably continue to grow, driven by several factors including increased awareness of global challenges, regulatory developments, technological advancements, and shifting investor preferences. The integration of ESG factors into mainstream investing is likely to continue, the focus on climate change and social issues, the enhancement of ESG data and analytics, and the rise of impact investing are among important trends going forward in sustainable investing.
Sustainable investing has the potential to drive significant positive change and, the investment community can play a crucial role in addressing some of the most pressing issues of our time, ensuring long-term prosperity for all stakeholders. However, investors, companies and policymakers will all need to work together to seize the opportunity to create a more sustainable and equitable future.
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