World finance also turns out to be sustainable. Investing responsibly is a requirement of the environment and society, but it is also a specific request of young and old alike. And the financial world responds.
by Mihir Desai
The theme of sustainability, central to the policies of every country given the increasingly worrying situation of global climate change, has imperatively entered among the objectives and modus operandi of big finance. Invest responsibly and sustainably it is, in fact, an increasingly felt need: it concerns all of us, but it is above all a need of the new generations. The expression "green finance", or "sustainable finance", which connotes it, was unknown to most people until a few years ago, and naturally derives from the best known expression of "sustainable development" which, created to define a development consistent with the protection of the environment and the conservation of resources for future generations was then extended to include also economic growth and social responsibility. And today it also coincides more and more with a growing attention to investments which, with all that is development in the name of sustainability, must have a high degree of adherence and consistency.
Young and old alike accept less and less that the financial instruments offered to them have connections with companies or businesses that do not respect the environment, society and people. Thus, the public demand for Responsibly sustainable investment opportunities are on the rise. And the offer, whether it comes from the public sector or from private institutions, must respond adequately. Investors are asking for it but, above all, the planet is asking for it. In fact, United Nations scientists issue warnings and systematic appeals warning that we need to change the regime, fight carbon emissions, use resources better, use renewable energy and consume in a more sober way.
The UN's Sustainable Development Goals (SDGs) are the expression of a broader global appeal for a new type of development strategy, and this can help investors steer their investments towards those companies that, by operating in a responsible and sustainable way, contribute to the achievement of goals of global significance.
Of course, this is not an easy time for us and the issues of climate change, which two or three years ago were the main concern of public opinion, have been overshadowed first by the global pandemic and then by the Russian-Ukrainian conflict. The market turbulence that followed highlighted the importance of strategies capable of face unexpected risks or external threats. Furthermore, they have shown that uncertainty undermines companies and investors alike and that risk management is essential to pursue long-term goals.
These issues are inextricably linked to the concept of sustainability, which by now determines every aspect of our daily life, from the choices of the individual to the definition of company practices and tools. Even "politics" promotes sustainability through laws and regulations aimed at mitigating social and environmental criticalities. But it is above all the new generation of investors who want a tangible return on investment in terms of Welfare for the environment and for the society whole.
This is the context in which a new type of sustainable investment is inserted characterized by a deep correlation with the 17 SDGs which, as is now widely known, contain 169 sub-objectives including the fight against poverty and inequality, the improvement of health and education and the fight against climate change. In identifying the SDGs, the United Nations quantified the investments required to achieve them, underlining the role fundamental of investments private. Given the importance of these objectives and their high impact on the financial sector, it is therefore entirely consequent that a new type of sustainable investment is being developed.
The new guidelines
The development of these sustainable investments is based on a thematic approach: the selection process identifies companies capable of achieving certain results in specific areas characterized by a deep link with one or more SDG objectives. This allows you to invest in specific and concrete issues aimed at improving society and the environment, such as, for example, renewable energy or solutions for food safety. Each selected company follows a well-defined path to achieve its business objectives, even if the size of the contribution in terms of sustainability is often difficult to quantify. That's why you need a capillary qualitative research process, examining the candidate companies and considering their social and environmental contribution based on the reference SDG objectives. An assessment that in the end must be the result of a constant dialogue between analysts at a global level, attentive to ESG criteria, i.e. those that measure the performance of the environment, society and process governance (Environment, Social, Governance).
The growing attention to sustainability on a global scale will favor likely companies that directly support the SDGs; the latter represent, among other things, an excellent starting investment solution for the development of ESG strategies. There are an increasing number of financial institutions, but also insurance companies that classify companies based on the extent to which they participate in the achievement of the reference SDG objectives, including in the portfolio only those with the highest scores and excluding a priori companies with poorly performing procedures in terms of sustainability.
Beyond impact investing
Sustainable investments share some similarities with the so-called "impact investing”(“ Impact ”investments), which have increased their popularity in recent years. There are, however, significant differences between them. Impact investing is characterized by the ability to quantify and monitor social and environmental performance, as well as the precise financial return of investments, often linked to a "real asset" such as a large infrastructure project. As a rule, impact investments concern private markets, although there is no shortage of examples in public markets, such as i green bond. In other words, impact investing presents a precise and quantifiable causal link between the investment and its impact.
SDG strategies invest in shares of companies that contribute to the achievement of Sustainable Development goals but, unlike impact investing, it is not possible to quantify the social and environmental implications through a single standard indicator. As part of a strategy focused on clean water supply, for example, investments can range from water supply companies to filter system manufacturers, with positive impacts across the board.
The segment of investment strategies related to the SDG objectives is booming, but it is one of the many possible responses of asset managers to the high demand for sustainable investments. The latter comes from investors aware of the potential return of specific companies at the forefront of the development of solutions linked to real assets that operate in a responsible and sustainable way. The demand for ESG investments comes from investors who recognize cutting edge companies in terms of business as aopportunities for financial, social and environmental returns.
While not all SDGs have their own financial equivalent, the world of asset management has just begun to consider their high potential for developing new investment strategies. An expansion of the offer is therefore foreseeable, which will help investors direct investments towards companies that are not only rapidly growing, but also attentive to causes of global interest.
Mihir Desai is a professor of finance at Harvard Business School.