Sustainable Investment: Thinking Long Term

There is always a strong bond between the market (businesses) and people (consumer/customer). Corporates cannot be irresponsible anymore due to public and investor eyes on their ethical and sustainable behaviors. There is no skip, and not following the supply-demand voice of the market ends in losing consumers and investors. Sustainable investment is making decisions based on environmental, social, and governance (ESG) aspects.

Environmental Social Governance (ESG)

There are two types of companies, 1) companies with sustainability at its core, and 2) those not considering it until they are forced, while two categories of investors are set for them, 1) investors doing a sustainability SWOT analysis and keen to invest, and 2) investors who do not care until face problems. ESG analysis provides investors with a clear indication of whether targeted corporate is devalued or valued. Besides, investors nowadays project beyond financial returns and are more interested in the impact of investment with clear outcomes.

According to the Global Sustainable Investment Alliance (GSIA), globally sustainable investment has increased by 15%, shifting to USD 35.3 trillion in the five leading markets, consisting of growth in Canada by 48%, the USA by 42%, Japan by 34%, and Australia by 25%. Europe has had a decline in growth by 13%. In terms of sustainable investment assets, Canada is a pioneer by 62%, Europe is 42%, Australia 38%, USA 33%, and Japan 24%. Overall statistically, the USA and Europe make 80% of the sustainable investment assets globally. The strategy in sustainable investment is ESG incorporation, norms and standards, corporate involvement, and stakeholder engagement.

Sustainable Investment

One primary driver of sustainable investment is government intervention and policies to align market players with the ESG framework. In 2018 the European Commission announced an Action Plan for Financing Sustainable Growth, and this plan paved the ground for numerous regulations across Europe. Different global organizations try to lead investors and corporates in adopting the SDGs framework. The UN Global Compact, with its Principles for Responsible Investment, has designed precise sustainable business models for corporates. In another approach, the Taskforce on Climate-related Financial Disclosures (TCFD) of the Financial Stability Board (FSB) has contributed to policies and investors’ behavior with a focus on climate resilience and risk mitigation. Another initiative by the United Nations Environment Program Finance Initiative (UNEP FI) introduced a more comprehensive and sustainable financial system.

Technology advancement and data can be an opportunity and risk for investors. They benefit as it makes operations more sustainable, and investors confidently make decisions. The negative side is about data if it is used irresponsibly. It includes the detection concept, in which other investors discover data sources of another investor that affects sustainable investment. The other is manipulation, which is changing data to harm specific investors to make a wrong sustainable investment decision.

Measuring the ESG performance of a corporate can be another challenge due to its divergence. Various institutions use different methods and indicators in ESG evaluation, and investors may find it confusing in the investment process. We have a long way to go and adopt more globally recognized standards for rating companies’ sustainability.

There are two types of asset managers who manage investment, 1) retail assets, individuals purchasing in banks or via investment platforms, and 2) institutional assets like academic institutions, pension funds, and foundations. Institutional investors dominate the financial market, but retail investors are emerging and increasing due to the importance of sustainability. Asset owners and managers, and investors are striving to minimize their carbon footprints according to Paris Agreement and government regulations.

Sustainable investment is proved by scientific research that follows excessive profits such as 1) low risks with long-term returns, 2) more access to financial resources and further investment, and 3) customers support even at the time of recession due to public caring for sustainability. A combination of ESG and financial analysis provides investors with insights about corporate performance in the market, leading to better cash flow in the future. To divide investors according to ESG, we can categorize them in two, 1) Quality Investors, who invest in companies with a high degree of ESG to have fewer risks, and 2) Growth Investors, who take the risk and invest in low performing companies related to ESG. Corporates tend to care for sustainability because of their realistic risk assessment.

Photo: MEE KO DONG/shutterstock

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