Sustainable investing is transforming the face of modern business. Its growing influence is pressuring companies into adopting a more sustainable and fair way of doing business.
Over the years it has grown from a rare occurrence to a common practice.
What is sustainable investing?
The term sustainable investing means investing in a company that takes into account its effect on society and the environment.
In practice, sustainable investing is heavily influenced by a company’s ESG score. These ESG or Environmental, Social and Governance factors include everything from combating climate change, preventing environmental destruction, and promoting corporate responsibility.
While ESG is closely associated with sustainability, it is more than that.
ESG scores are formed by combining various Environmental, Social, and Governance Key Performance Indicators. Different types of ESG KPIs all affect a company’s ESG score differently. That’s why each ESG score is specific to the industry of the company. These KPIs are derived from recognized standards or regulations and just like any other business metric, can be used to assess a company’s operating performance and risk.
The turning point
In 2006 the United Nations launched an initiative meant to encourage investors to invest in responsible-minded companies. This helped define what a sustainable investment is and established its guiding principles.
However, another decade had to pass for this to become widespread.
The Paris Climate Agreement of 2015 is considered to be the turning point of sustainable investing. A historic agreement was reached by the member states of the UN to combat climate change and to accelerate the actions needed for a sustainable future.
From that moment on, investors of all sizes became concerned with the practice.
Sustainable investing has become the rule
A significant increase in sustainable investments has happened over the last couple of years. Conversely, a growing number of investors are making decisions based on ESG factors. According to a 2021 poll, 70% of investors state that a company’s ESG policies are important to them, meanwhile 39% of investors believe they make a positive impact on the environment.
The growing occurrence of environmental consciousness aside, investors are also factoring in ESG because it helps them avoid risk.
This sentiment is echoed by investment giants like BlackRock, Vanguard, and JPMorgan Chase, who are also heavily emphasizing their commitment to ESG. Some of the portfolio managers in these investment firms even consider climate risk equal to investment risk.
This explains why companies that focus on their ESG strategies are outperforming those that don’t.
The momentum of sustainable investing will only increase as the European Union (EU SFDR) and the United States put in place regulations that aim to standardize ESG criteria and make them more transparent. This will enable many investors to take an informed decision and further encourage sustainable investing.
What does this mean for your company?
Adopting sustainable initiatives for your company can help attract investors and improve its public perception. Depending on the industry your company’s in, it might even give it a competitive advantage.
But that’s only if you’re either already engaged in such initiatives or if you’re moving fast to adopt them.
Comprehensive ESG and CSR strategies are quickly becoming commonplace. Many companies are adopting sustainable initiatives to capitalize on the growing number of sustainable investors and environmentally conscious consumers.
Very soon it might be too late to exploit the full potential of this movement toward sustainability.
That’s because sustainable investing isn’t the future anymore – it is becoming the rule.
If you haven’t incorporated a sustainable strategy for your company, there’s still an opportunity for you to do so.
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