Over the past several years, asset owners, managers, and investors have taken the ethical route through the practice of sustainable investing. While, at first, this was a way to become more compliant with environmental, social, and governance (ESG) standards, it is now an imperative given the palpable impact climate change has had in terms of damage to both businesses and communities.
In 2015, nations that signed the Paris Agreement meant to put a cap on the relentless rise in global temperatures. But, unfortunately, current information shows that humanity is nowhere near the 1.5ºC target set six years ago. Indeed, more drastic measures need to be taken if we are to attain this goal.
Despite this and the ongoing pandemic, more and more companies and institutions are committed to adopting more sustainable ways to work. This has resulted in a reallocation of capital among both investors and asset owners who see how private capital can be used as a catalyst for change.
Of late, a number of large institutions with long-term investment plans, including sovereign wealth and pension funds, are adhering to ESG principles when it comes to investing. But sustainable investment is something that can be done beyond institutions and corporations; it also has a place in personal investment, particularly where long-term retirement portfolios are concerned.
These days, younger investors see it as an area where they can invest sustainably. They also see it as something that is in keeping with many investors’ values.
Another reason why many are getting into sustainable investment is risk management. Many experts agree that companies that ignore risks or make imprudent investments may eventually incur substantial costs. As a result, these can keep them from earning sustainable profits in the long run. The challenge now lies in how well corporations can identify, address, and mitigate unsustainable practices, as this can directly impact their competitive advantage in a world that is increasingly aware and savvy about sustainability practices.
Throughout the world, financial advisers and asset managers have become more careful in their scrutiny of sustainability disclosures – not only as a point of good corporate governance or transparency. It can also ferret out companies who practice greenwashing, an unscrupulous way of making investments look more eco-friendly than they actually are.
Meanwhile, Europe’s Sustainable Finance Disclosure Regulation (SFDR) was signed into effect earlier this year, essentially making sustainability reporting a mandatory step to get more transparent disclosures on how investors and companies consider ESG risks in investment. The rest of the world is following suit, and it is expected that some Asian nations will have their own version of the regulation come 2022.
