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What is sustainable investment?

“Sustainable investing directs investment capital to companies that seek to combat climate change, environmental destruction, while promoting corporate responsibility.”


(Source: Investopedia)

To invest, or not to invest, that is the question.

We’re having a bit of a ‘moment’ when it comes to sustainable investment. The buzzword is a product of the increased pressure on today’s society - both you and I, as well as companies and investors, to get to grips with our impending doom that is the climate crisis. It's causing us to pause for self-reflection: “What can I do to make a difference?”

So in the interest of getting to the point, what actually IS sustainable investment? Well, you could view sustainable investment through a similar manner of self-reflection, with investors and financial institutes asking:


“Are we putting our capital into companies that do good or those that do not?”

or “Will our investments have a positive impact on the planet or a negative one?”

In actual fact, the reality is just not quite as clear-cut as that. What we do know is that there’s elevated recognition that significant funding in the right places is what’s needed to drive us in the direction of a more sustainable way of life.

So sustainable investing is investment that considers our environmental and social challenges. Sustainable investment steers funds to businesses aiming to combat or improve recognised sustainability issues, be it climate, education or equality for example.

In the past, concerns over the financial performance of these sort of funds have been in question, but studies have proven that their performance matches that of ‘conventional’ investments1. More financial institutions are also acknowledging that businesses who aim to tackle the problems that need solving are in fact in a strong position to offer good financial returns.

Moving on up

Part of the interest in sustainable investment is being driven by millennials, with research showing that this much talked about market segment, are inherently interested and invested in (no pun intended) doing good with their money, they want to align their personal values with their investments2. So we’re seeing more portfolios and products presented by asset managers and financial institutes that are able to meet those demands.

In actual fact, sustainable investment has been around for decades, though it has grown in popularity (and visibility) in recent years with a 34% increase recorded between 2017-20193. Investors are keen to know where their investments are going, and require visibility about its effect on the planet. Essentially, it's investing with morality as a core consideration. But the question is – how is that being done?

What’s in a name?

Sustainable investment, whilst being relatively well known by the wider public, is a term that is not actually moderated so it can have different meanings to different individuals or corporations. Its breadth is pretty vast, so to simplify things we’ve categorised the main approaches/techniques used in investing that fall under the ‘sustainable investment’ umbrella.

Sustainable Investment and its many forms.

ESG

Probably the most widely recognised iteration of sustainable investment, ESG stands for environmental, social and governance and is a reporting system used by investors to measure certain standards within a framework, relating to the practices of companies'. They use the outcomes to assess companies and make their investment decisions. The data itself is usually submitted by the company in question on a yearly basis and asks them to disclose certain data points and pieces of information.

As per the name, there are 3 pillars of measurement with various criteria; here are some examples of the types of data and practices being reported on:


Environmental: Recycling practices, pollution, climate policies or greenhouse gas emissions.


Social: Employee development and diversity, relationships with suppliers or communes where they operate, working conditions.


Corporate Governance: Transparency with stakeholders, the running of the business, accountability and leadership.

In short, investors using ESG data in their investments have the intent to invest in a business with good ratings, ratings that give us an idea of how well a company is managing their business. There are also many rating agencies that exist to gather and analyse this data for investors.


SRI Investing

Socially Responsible Investing, incorporates ESG criteria into the analysis done during the investment process. Investment decisions are based on both the long term profits as well as the implications for society and the environment. Investors, therefore, review and balance the social costs of their investments in conjunction with the forecasted profits.

SRI investing is sometimes called ‘Ethical Investing’ or ‘Green’ investing and some investors also consider SRI to stand for Sustainable, Responsible and Impact Investing – so there are even blurred lines in each of these formats. One thing that these types of investing strategies often do is rule out investment in certain industries (for example fossil fuels or tobacco companies) they also ensure that the companies included meet certain ethical criteria.


Triple Bottom Line

Triple bottom line investing or TBL is a framework that uses the pillars of Social, Environmental and Financial performance measures. This form of sustainable investment can also be referred to as ‘People, Planet, Profit’ or ‘Integrated bottom line’ or even ‘3BL’.

Triple bottom line investing aims to measure the impact of these companies’ on the world. However, the measurement of said impact is still a grey area.

"There is no universal standard method for calculating impacts in TBL.4"

This means that companies are actually free to employ their own measurement methods, however more have begun to use GRI (Global Reporting Initiative) in an attempt to better standardise the reporting of impact.


Impact Investing

This type of investing does what it says on the tin, they aim to create social and environmental impact. These funds use capital for good, directing money to companies that directly address environmental or social issues with their products or services.

These are merely a few examples of how sustainable investment is being put into play, by no means is this list exhaustive but it gives you a good idea on how this approach is being integrated to offer these sustainable investments to those demanding it.

With these methods in mind, we can start to see a shift in priorities, profit as the sole and all-encompassing goal of a business is now being followed up with additional thought regarding the planet and the people in it. If a businesses core goal is solely to please the guys at Wall Street, well then it is likely to be at the detriment of other stakeholders, and these investment strategies are beginning to address that issue - especially as stakeholders are demanding better transparency and higher ethical considerations.

Too soon to celebrate?

Could we be witnessing the shift to a great new way of working, that brings societal and environmental progress up to the same level of importance as profit? Well before we pop the champagne, we must consider some of the potential pitfalls this new(ish) wave of investment can have.


Objectivity: The data used in these types of investing are often formulated on the data submitted by the company in question. This self-reporting makes it subject to potential bias, varying benchmarks between industries and businesses and what’s more, they can often submit unaudited data that ESG rating agencies use without question.


Comparability: Ratings produced in the current format can vary massively from one supplier to another due to their difference in approach or data interpretation, making it hard as an investor to compare across each industry.


Timeliness: Business are generally submitting this data on a yearly basis, with that in mind, data is often outdated before it has even been utilised by investors to make decisions.


Impact Investing: Whilst impact investing provides great businesses; tackling some of these social and environmental challenges, with much-needed funding, this only accounts for around 10% of the total investment being made worldwide. It also does not address the large established businesses out there that have the most profound and immediate impact on the planet and the people in it, at a much larger scale.


Practices not impact: Much of the ESG scoring systems are based on businesses practices, and policies. It takes into account the intentions and actions of a business rather than going to the core of the matter – their impact. When looking more closely into ESG scores the picture is somewhat surprising. The best example we could offer is when you look at the scores from a business like Repsol, a fossil foil company, and Nordex, a wind turbine manufacturer.


Scores are out of 100... (100 being the best score a business can receive)

Repsol: 91

Nordex: 68

(Source Sustainalytics 2019)


Does something seem a little odd to you? An oil company is a more sustainable investment than one supplying the means to generate renewable energy? Indeed, something just doesn't stack up.

What’s next?

With this in mind, we must start to consider how we can improve, and how sustainable investment can truly become sustainable.

Enter: Impaakt. We were actually formed by a collection of investment specialists who were concerned about the current methods in place to measure businesses.

The founding team set out to create a new method of measurement by looking at impact and not practices. Because of the complexity of the problem to solve, the end result was to utilise crowdsourcing, not single experts. This approach allows consumers, employees and inhabitants of this planet, who feel the impact of businesses on a daily basis, to make a difference by building this knowledgebase together, holding companies accountable. The result: the impact score that denotes a real reflection of the impact a company has on the planet. The end goal being that the data is utilised by investors to make informed decisions, decisions that consider the environmental and social value of a business alongside its financial value.

You can learn a little more about us here, and why not join us in reinventing the way the world does business? Together we're changing the sustainable investment landscape to one with a little more impact. Well, impaakt actually.



Sources:

1. https://www.cnbc.com/2019/10/10/imf-research-finds-esg-sustainable-investment-funds-dont-underperform.html 2. http://hi4csr.com/en/blog/millennials-are-driving-interest-in-sustainable-investment/ 3. https://www.bloomberg.com/news/articles/2019-04-01/global-sustainable-investments-rise-34-percent-to-30-7-trillion 4. http://maximpactblog.com/a-guide-to-the-different-types-of-social-investing/

Impact in action.

Impaakt is a free access platform, so why not check out a selection of company impact scores and get a feel for what impact they're having on the planet?

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