Sustainable Investing is an investment discipline which aims at considering environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial return and positive societal impact (Source: US SIF).
The umbrella of sustainable investing covers Socially Responsible Investing (SRI), Impact Investing and ESG Investing. These terms are often used inter-changeably when discussing about sustainable investment.
The genesis of sustainable investing can be traced back to Quaker and Methodist community. They refrained from investing in business involved in dealing of alcohol, gambling and tobacco.
First socially responsible mutual fund was launched in the United States known as PAX World Balanced Fund in 1971, which avoided investment in any companies which were profiteering directly or indirectly from Vietnam War.
In 1990 one of the first SRI Indices called Domino 400 social index (currently known as MSCI KLD 400 Social Index) was launched. This would track 400 companies which were in socially responsible business.
In 2004 under the guidance of United Nations paper titled “Who Care Wins” was published. The term ESG was first coined in this paper.
In 2006 Principle for Responsible Investment (PRI) initiative was launched in 2006. The PRI is UN backed largest global network of institutional investors pledging to incorporate ESG into principle of investment.Source: Morningstar, Bailard Thought Series, United Nations Report
Notwithstanding the fact that one of first socially responsible fund was launched in United States back in 1971, today sustainable investing has its footprint across the globe. Europe leads the flock followed by United States. Five major regions where sustainable investment has grown tremendously are Europe, United States, Japan, Canada and Australia and New Zeeland.
REGION-WISE BREAK UP OF SUSTAINABLE INVESTMENT FROM 2012 – 2018 (IN US $ BILLION)
Further the AUM under Principles for Responsible Investment has increased from US$6.5 billion in 2006 to US $ 103.4 billion as of March 2020. The number of signatories to the initiative has increased from 63 in 2006 to 3038 in 2020.
The term ESG however stands for Environment, Social and Corporate Governance (ESG). ESG investing refers to investment method which explicitly incorporates the impact of environment, social and governance on companies process along with other financial parameters while making investment decision.ESG investing provides extra non-financial information that helps in identifying long term sustainability of the business over the years.
Simply put ESG focused companies have the potential to generate more wealth for stakeholder by :
As per study conducted by University of Oxford in 2014 under the paper titled “From Stockholder to the stakeholder” found out that:
Sustainable Investing incorporates Environmental, Social and Governance (ESG) factors into investment decisions as a mean to contribute towards the sustainable development of the community, better manage company specific risk and potentially enhance long-term returns.Read More
The imbalance in the ecosystem is increasingly visible with the rising number of disasters, such as wildfires, floods and droughts, with the latest being the Covid-19 pandemic.Read More
While traditional investing has focused on financial metrics, sustainable investments combines the best in class practices of traditional investing with insights about society to produce better outcomes for investors in the long term.Read More
ESG stands for Environmental, Social and Governance. Any company which is doing well today and hopes to sustain the progress in future as well will mostly be compliant with ESG. There is also growing evidence that suggests that if ESG factors are integrated into portfolio construction and investment analysis, it may offer investors potential long-term superior performance.
E stands for the Environment. As world is getting more conscious about pollution control and climate change, the companies following this will be less likely to be impacted compared to those companies which do not regard this aspect. Some of the E factors are supply chain efficiency, recycling and waste management etc.
S stands for Social which includes the social responsibility that the responsible companies are adhering to. This includes CSR initiatives, human rights, consumer protection, employee well-being and their safety measures and working towards work life balance etc. Obviously, the companies which are socially responsible are more appreciated by their employees, Government and other stake holders.
G stands for Governance. Governance risks concern the way companies are run. It addresses areas such as corporate brand independence, increasing diversity and accountability of the board, protecting shareholders interest and their rights. Also, when it comes to financial disclosures, it needs to be checked if the board upholds the highest standards of corporate governance consistently and remain unaffected by any regulatory changes etc.
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