Investing in a carbon-neutral, greener planet and a more equitable society may sound good but what does it actually entail ? The Harvard Business School defines sustainable investing as a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social value.
Sustainable investing promotes long-term social and financial gains by encouraging businesses to adopt sustainable principles. It fosters purpose-driven firms that create social and environmental impacts beyond their core offerings. Sustainable business strategies are instrumental in addressing global challenges like climate change.
The United Nations Global Compact provides a framework whereby companies adhere to implement universal sustainability principles on a voluntary basis, including human rights, labour, environment and anti-corruption. This combines with the Principles for Responsible Investment, an investor initiative in partnership with the UNEP Finance Initiative and the UN Global Compact that offers a menu of possible actions for incorporating ESG issues into investment practice.
Six local entities have subscribed to the UN Global Compact with the total exceeding 22,600 participants worldwide. It is augured that a greater number of local corporations participate in this initiative.
The concept of sustainable investing has gained traction and has been reshaping the future of finance. Asset managers globally are expected to increase their ESG-related assets under management to an estimated US$34tn by 2026. Global assets under management are set to hit US$145 trillion by 2025.
Yet there remains confusion about its meaning and consequences. Organizations must grasp the significance of sustainable investing and make the required adjustments to attract these investments. ESG factors are now being considered when making investment decisions. Finance plays a crucial role in incentivising behaviour change by rewarding initiatives that enhance our surroundings. Examples include the issuance of green bonds and implementing ESG reporting and monitoring practices.
Profitability is crucial for businesses as it drives efficiency, growth, and the ability to provide better goods and services. It also contributes to employment and serves as a tangible measure of success. At a policy level sustainable finance has a key role to play in delivering the policy objectives under the Green Deal which aim that the EU eliminates or offsets its greenhouse gas emissions by 2050 in line with global efforts to limit global warming to 1.5-2°C above pre-industrial averages.
Last January 5, the Corporate Sustainability Directive entered into force, strengthening the rules concerning social and environmental information that companies must report. New rules ensure investors have climate change risk information, transparency in business impacts, and discourage short-termism that hinders long-term economic development and ESG principles.
Sustainable investment has shown potential to grow a company’s value, yet many companies still focus on ticking ESG boxes. However, there are signs of change as capital raising and debt become more ESG-driven. For example, ESG funds are mutual funds that are graded using ESG principles. ESG funds invest in companies with business practices that allow them to have a sustainable and societal impact in the world. Some ESG funds are broadly focused, while others are fairly specific. Also, the SPDR S&P 500 Fossil Fuel Reserves Free ETF allows investors to invest in S&P companies that don’t own fossil fuel reserves.
Locally we have seen the launch of the beverage container refund scheme which incentivises the return of single-use beverage containers. We have also seen the launch of The Malta ESG Platform which helps illustrate the ESG credentials of companies listed on the Malta Stock Exchange, and this in turn allows investors to incorporate these credentials into their investment decision-making.
Integrating ESG principles into business strategies enhances reputation, attracts talent, secures financing, and opens new markets. Sustainability mitigates risks, enables adaptation, and drives innovation, while increasing efficiency and cost savings.
Demonstrating sustainable practices attracts responsible investors and unlocks new capital flows. Ultimately, sustainable investment is a pathway to achieving financial gains and ethical responsibility simultaneously.
Mark Aquilina, founder and Chief Visionary Officer at NOUV.