22 Finance Monthly. Inve s tmen t Sustainable investing explained Sustainable investing is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact. Various other terms are often used such as responsible investing, impact investing or ethical investing – while there are nuanced differences, it’s fair to say that the commonality is to achieve positive change, invariably with a social or environmental dimension. However, sustainable investing isn’t just about avoiding investing in companies that do harm. There is a new class of investors actively seeking out companies that address daunting social and environmental challenges while also delivering financial returns. These companies fall into a wide range of industries and sectors - ranging from food to transportation, from healthcare to education – the universe for sustainable investors is extensive. Jumping on board Even as recent as five years ago, the mainstream investment community was largely disengaged fromdiscussionsabout sustainable investing. These conversations remained firmly within niche corners of the industry. This is shifting dramatically, with most big investors now believing sustainable investing to be good risk management, leveraging the practice to help manage risk in uncertain times. For sure, the COVID-19 pandemic has been somewhat of a game-changer in this regard because it turns out that companies that manage sustainability risks better, manage other risks better as well. It helps also that some big names are getting more vocal about sustainable investing. Perhaps a pivotal moment happened in early 2020 when Larry Fink in his annual letter famously stated that Blackrock would put sustainability at the centre of its investment strategy. With all this momentum underway, we are going to see investors strengthening their ESG commitments and demand for sustainable and green products growing at a rapid pace. The role of policy and regulation There is a great deal happening on the global policy agenda too which is shaping the way many investors are thinking about sustainability. The Paris Agreement on Climate Change gave us a global carbon budget, and we are seeing widespread commitments being made by corporates and investors alike to achieving the Sustainable Development Goals. All this bodes well - and let’s face it, now we have the US back at the table, things are certainly looking up. On the regulatory front, the European Union is leading the charge, with its Sustainable Finance Action Plan a sea change for investors. This includes new requirements to disclose the sustainability credentials of funds and regulations aimed at boosting transparency. The EU is certainly out front on sustainable finance regulation but countries around the world are watching closely on its success in implementation and are likely to follow suit in the months and years to come. Looking out for sustainable stocks – what is out there? The sustainable investing universe is wide and ESG is a broad church. However, as we look to the future certain themes and issues will gain more attention than others. For example, climate change will remain a top priority for many investors. At the end of last year, COP26 pulled together some significant private-sector commitments, particularly around driving trillions of dollars towards climate solutions. The momentum is clear as many large corporates make net-zero commitments, often more ambitious than national commitments. These are the companies that are worth looking at because they are embracing the inevitable. At the same time, these actions are also being spurred on by a push back against high-carbon companies, especially Big Oil. Last year, a number of global fossilfuel giants suffered embarrassing “We have many reasons for optimism and 2022 is likely to see a sustainable investing boom.”
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