With research pointing towards a positive link between sustainable investment goals and long-term value creation, it is fair to assume that investors are increasingly looking for sustainable ways to put their capital to work. Sustainable investing, also known as responsible investing, is rapidly growing into the mainstream.
The surge in investors subscribing to the UN-supported Principles for Responsible Investment (PRI), representing over $80 trillion (€70 trillion) assets under management, is the latest of numerous indicators of the increased attention that the global investor community is paying to the impact of environmental, social and corporate governance (ESG) factors on the risk-return attributes of investment.
The PRI define responsible investment as a strategy and practice to incorporate ESG in investment decisions and active ownership. ESG brings to mind environmental issues. While these form an integral component of ESG, they are merely representative of one of three pillars underpinning sustainability, impact measurement and management.
For instance, consider the social dimension – this is an approach to investing that puts humanity at the centre of economic activity, with the aim of preserving the welfare of all stakeholders. It deals with hu-man rights, diversity and working conditions, to name a few.
In a recent annual address to CEOs, Larry Fink, CEO of asset management behemoth BlackRock, urged businesses to consider the social implications of their investment decisions, stressing that “to prosper over time, every company must not only deliver financial importance but also show how it makes a positive contribution to society”.
Although it has been proven time and again that social metrics, despite their intangibility, have a measurable financial impact on investment, attention to social considerations is still not a priority to many. Fink warns, however, that sooner than most anticipate, there will be a significant reallocation of capital, and investments that “present a high-sustainability-related risk” will take a significant hit.
Onto the other pillar of ESG, good corporate governance provides the structure through which the objectives of a company are identified and the means of attaining those objectives are determined. It is about having the correct policies and procedures in place and maintaining a culture where good relations among the company’s board, management and shareholders provide positive contributions to the company’s long- term strategy.
Poor corporate governance practices feature heavily in corporate scandals – the latest to make headlines, relating to Munich-based payment processor Wirecard AG, thrust corporate governance in the spotlight again.
Against today’s backdrop of economic uncertainty, more and more investors are recognising the importance of responsible investing and choosing to put their money into companies that act responsibly and are less likely to suffer operational concerns or fall foul of regulation.
As ESG is embraced further by the investor community and wider society, there is a growing expectation for businesses to connect finance with sustainability, where necessary reassessing their purpose, business strategy and value drivers with a view to recognising and addressing environmental, social and governance risks when taking key decisions.
This piece forms part of Camilleri Preziosi’s ‘Sustainable Finance’ series, in which members of the firm’s Capital Markets and Finance practice groups explore and evaluate emerging trends and opportunities in the sustainable finance economy.
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