Everything about sustainable finance: what it is, how widespread it is, and what strategies exist for investing your money while respecting the environment and people.
For those outside the industry, "finance" usually means just one thing: profit at any cost. Fortunately, however, there is a great deal more to it than that. Let's take stock of sustainable finance — a world that was virtually unknown little more than a decade ago, but is now a well-established reality. A reality capable of changing the world for the better, by channelling resources towards activities that are responsible towards the Planet and people.
As interest in sustainable finance has grown — along with the volume of assets under management — so too has the number of financial products on the market. All of them, however, can be traced back to a very precise common thread: they combine analysis of financial data with that of environmental, social and governance factors (known in the trade as ESG, from the English words environment, society and governance). Environment means evaluating choices related to energy, commitment to tackling climate change, and the use — whether considered or not — of natural resources. On the social side, the picture involves employees' working conditions and relations with the local community and territory. A company with good governance, finally, is transparent and fair in all its decisions, from remuneration to ties with the political sphere.
| Environment (E) | Social (S) | Governance (G) |
|---|---|---|
| Climate change | Working conditions | Executive remuneration |
| Greenhouse gas emissions | Relations with the local community | Corruption |
| Resource exploitation | Conflicts | Lobbying activities |
| Waste | Health and safety | Contributions to political parties |
| Pollution | Employee relations and diversity | Tax policies |
| Deforestation | Child and forced labour | Board diversity |
Not all sustainable investments are the same: over the years, many different approaches have emerged, allowing investors to choose the one that best reflects their own values and needs. Eurosif (the European Sustainable Investment Forum) has sought to bring clarity to this landscape by identifying the seven strategies for investing your money responsibly.
Impact investing is the newest of these approaches, but it is also the most experimental and innovative. It is something very different from philanthropy: not outright donations but genuine investments that must generate a return in the future, at rates that may be below or above market levels — all while delivering a positive impact on the Planet and society. From November 2016, the first impact fund made its entry onto the Italian Stock Exchange.
The challenge is by no means straightforward, but the data are encouraging. A study by Giin (Global Impact Investing Network) surveyed 209 investors active in impact investing, finding that in 98 per cent of cases the investments had met or exceeded expectations in terms of social and environmental impact. 91 per cent of respondents said the same with regard to financial performance.
Undoubtedly, as a study conducted by Novethic underlines, the most delicate issue to resolve is that of methodology: work is under way on several fronts to establish solid, objective criteria that distinguish investments with a genuinely positive impact from those that are sustainable in name only. This is unquestionably a crucial factor for the growth of sustainable finance.
When it comes to ethics and sustainability, some prejudices seem remarkably hard to shake. The most deep-rooted is undoubtedly the belief that doing good for the Planet requires sacrifice. Nothing could be further from the truth — not even in the world of finance. And the data prove it.
Analysing more than 2,000 academic studies conducted from the 1970s onwards, a team of researchers found that 90 per cent of the research identifies a "non-negative" relationship between attention to ESG criteria and the financial performance of a company. Indeed, in most cases the more responsible companies are also the most financially sound over the long term.
Morningstar, the world's most renowned and authoritative provider of independent financial research, reached the same conclusion; in 2017 it introduced a fully fledged sustainability rating for funds. Drawing on data from thousands of investment funds between 2002 and 2016, analysts found no discrepancies between ethical funds and all others in the Morningstar rating, which assesses risk-adjusted performance.
These figures appear to be starting to make an impression among industry professionals. Only 35 per cent of the six hundred institutional investors surveyed by State Street Corporation believe that taking ESG factors into account puts their returns at risk. Indeed, three in four are confident of outperforming through their sustainable investments within three years.
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But what are the volumes of sustainable finance? Eurosif gives us an answer, publishing an in-depth annual study on sustainable investment in Europe. The latest edition, published in November 2016, reveals that across our continent the sustainable and responsible investment market made a 25 per cent leap between 2013 and 2015. Sustainable finance is no longer the exclusive preserve of banks and insurance companies, given that retail investors (i.e. private individuals) are increasingly taking centre stage, rising from 3.40 per cent to 22 per cent of assets under management.
Among the seven approaches to sustainable finance, exclusions are the dominant strategy, having surpassed the 10 trillion euro threshold and posting a stratospheric +48 per cent over two years. But all the other strategies are also growing, albeit with lower overall volumes. Investments based on compliance with international norms and standards are second on the list with more than 5 trillion euros, followed by engagement (up 30 per cent in two years) and ESG integration (over 2.6 trillion euros). Closing the list are the most innovative and complex approaches: best in class (493 billion), thematic investments (145 billion) and impact investing, with more than 98 billion euros. What is striking about impact investments, however, is their extraordinarily rapid growth: as recently as 2011 they stood at just 8.75 billion euros, and in 2013 at 20 billion. This means that in just two years they grew by 385 per cent.
When it comes to sustainable finance, Europe is responsive and at the forefront: nearly half of all "ethical" assets on a global scale are found on the Old Continent. This is demonstrated by the latest edition, published in March 2017, of the biennial report by the Global Sustainable Investment Alliance (GSIA), the only study that examines the universe of sustainable investment in Europe, the United States, Canada, Japan, Australia and New Zealand. The sources are the individual associations working for sustainable finance within each of these macro-regions; the differences in figures compared to the Eurosif report are due to different analytical methodologies. At the start of 2016, sustainable finance had reached 22.890 trillion dollars worldwide, gaining 25 per cent compared to 2014, when it stood at just over 18 trillion. In almost every region, the share of responsible finance in total professionally managed assets also grew. As in Europe, the most common strategy worldwide is exclusions, while impact investing is the smallest in numerical terms but the fastest growing (+146 per cent in two years).
Until little more than a decade ago, sustainable finance was virtually unknown. If it has achieved the results we have just outlined, it is also thanks to the work of a number of bodies that have regulated and promoted it at global, regional and national level. We mention a few of them.
Founded in 2005 at the initiative of then United Nations Secretary-General Kofi Annan, the Un Pri (United Nations Principles for Responsible Investments) are a United Nations initiative, in partnership with the Global Compact and Unep Fi. They consist of six principles that financial operators can voluntarily sign up to, upon payment of an annual fee, committing to publishing an annual report on their responsible investment policies. In brief, members commit to incorporating ESG issues into their decisions and to actively championing them, both towards the companies in which they invest and within the financial world at large. Eleven years after the principles came into force, there are 1,748 signatories worldwide, collectively managing approximately 70 trillion dollars. Italian signatories, for now, number just 21.
Eurosif, based in Brussels, is the European Sustainable Investment Forum. It is to this organisation that we owe the report aggregating all data at continental level each year, as well as a dense series of events and initiatives to raise awareness among financial operators and the general public. Together with its counterparts (the American Us Sif, the Asian ASrIA and so on), Eurosif is among the founders of the global network Global Sustainable Investment Alliance. Tweets by Eurosif
In Italy, the body promoting social and environmental responsibility in investment is the Forum per la finanza sostenibile. Its flagship event is the Settimana SRI, held every year in November: a series of events between Milan and Rome, free of charge and open to the public, to present up-to-date data and share the most interesting and promising trends.