Sustainable finance creates value over the long term, both for the investor and for the Planet and society. An approach that is gaining ever more traction.
"Achieving climate neutrality requires both political will and investment. We need to bring the financial world on board." These are the words of Ursula von der Leyen, President of the European Commission, who has centred her mandate on the promise of zeroing out the Continent's climate impact by 2050. And it is true that finance can play its part in building a better world — a world characterised by balance with the Planet, social equity and shared prosperity. It is no coincidence that sustainable finance is being talked about more and more.
Sustainable development, as stated in the United Nations' Brundtland report, is development that "meets the needs of the present without compromising the ability of future generations to meet their own needs." Applying this principle, sustainable investments create value both for the investor and for society as a whole, through a strategy "oriented towards the medium-to-long term that, in the assessment of companies and institutions, integrates financial analysis with environmental, social and good governance analysis," as defined by the Forum per la finanza sostenibile.
In technical parlance, this refers to ESG factors — environmental, social and governance. A few examples? Before investing in a company, an asset management firm might, for instance, verify that it has adopted an emissions reduction plan (environmental), health and safety at work protocols (social), or anti-corruption policies (governance). These assessments do not replace purely economic and financial ones, but complement them. The investor, after all, always aims to obtain a return.
Are we talking about a pioneering niche? Far from it. This is demonstrated by the most up-to-date figures available, reported in the biennial report published in 2020 by the Global Sustainable Investment Alliance (GSIA). Adding together the United States, Canada, Japan, Oceania and Europe, the total comes to 35,300 billion dollars in assets under management, equivalent to just over 30 trillion euros. The growth is tangible: +25 per cent in two years, +55 per cent compared to four years earlier.
35.9 per cent of assets under management in these markets now fall within the definition of "sustainable investments" (in 2018 the figure stood at 33.4 per cent), with peaks of 62 per cent in Canada and 42 per cent in Europe (where growth actually slowed during the two-year period, but only as a result of a change in measurement methodology). The United States and Europe dominate, accounting for 80 per cent of the sustainable investments monitored between 2018 and 2020.
The course towards sustainable development is set by the United Nations 2030 Agenda, a global plan for the Planet, people and prosperity, made up of 17 Sustainable Development Goals (SDGs) that the 193 UN member states have committed to achieving by 2030. Goals that, however, appear even more distant after a pandemic that has deepened hunger, poverty and inequality across vast areas of the Planet. Even before Covid-19, it was estimated that achieving the SDGs would require an additional 2,500 billion euros per year in investment. Today, according to the Organisation for Economic Co-operation and Development (OECD), the gap has widened by a further one trillion.
This is why it becomes important — indeed essential — that financial flows move in this direction too. "Aligning with the SDGs unlocks resources, directs them towards real needs and builds a more sustainable and inclusive economy that protects against risks, creates resilience and generates financial returns and economic growth. The rationale has never been stronger," the OECD emphasises. The Paris Agreement — the most important international climate treaty — even puts it in black and white: financial flows must be "consistent with a pathway towards low greenhouse gas emissions and climate-resilient development," states Article 2.1.
But in practice, how does an institutional investor direct its capital towards a more sustainable model? The first strategy, the most basic, is to exclude sectors deemed insufficiently ethical, such as tobacco, arms, or perhaps fossil fuels as well.
Alternatively, one can opt for the opposite approach: not to exclude, but rather to seek out companies that make a positive contribution. For instance, one can select organisations operating in the fields of health, renewable energy or green technologies (thematic investments), those that achieve high ESG performance (best in class) or that comply with international norms and standards; or one can integrate ESG considerations into financial analysis.
Those who choose impact investing go one step further, making an investment with the stated intention of achieving both a financial return and a positive environmental and social impact, to be measured and reported on. Finally, the shareholder also holds considerable power: that of engaging in dialogue with the management of investee companies or exercising their voting rights at general meetings. A power that can be used to encourage sustainable policies (engagement).
Sustainable finance represents a paradigm shift and, as such, can be daunting. Among the myths surrounding it, one is particularly persistent: the belief that taking ESG factors into account automatically means relegating returns to second place. In reality, analysts have long argued precisely the opposite. Extrapolating data from Bloomberg, for example, the specialist platform Esgnews goes so far as to say that in 2020, 84 per cent of European funds labelled as ESG delivered a positive return. Clearly, it is not possible to establish a clear cause-and-effect relationship, as the variables at play are countless. It is also true that a large body of sector research has by now identified correlations between companies' improved management of ESG issues and risks and their financial performance.
Articolo sponsorizzato
