Sustainable finance refers to any form of financial service integrating environmental, social and governance (ESG) criteria into the business or investment decisions for the lasting benefit of both clients and society at large. In other words, it ensures and improves economic efficiency, prosperity, and economic competitiveness both today and in the long-term, while contributing to protecting and restoring ecological systems, and enhancing cultural diversity and social well-being.
Activities that fall under the heading of sustainable finance, to name just a few, include sustainable funds, green bonds, impact investing, microfinance, active ownership, credits for sustainable projects and development of the whole financial system in a more sustainable way.
Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in ESG practices. They may actively seek out investments, such as community development loan funds or clean tech portfolios that are likely to provide important societal or environmental benefits. Some investors embrace Sustainable and Responsible Investing (SRI) strategies to manage risk and fulfill other duties. They review ESG criteria to assess the quality of management and the likely resilience of their portfolio companies in dealing with future challenges. Some are seeking strong financial performance over the long term. Academic research shows a strong link between ESG and financial performance.
The US SIF Foundation’s Report on US Sustainable, Responsible and Impact Investing Trends identified $8.72 trillion in total assets under management at the end of 2015 using one or more sustainable, responsible and impact investing strategies.
Major SRI Drivers and Trends
In recent years, numerous trends have shaped the evolution and growth of SRI within US financial markets:
• Environmental investment factors apply to $7.79 trillion in assets under management. Climate change criteria shape the investment of $1.42 trillion in assets under management, a more than fivefold increase since 2014. Clean technology is a consideration incorporated by money managers with $354 billion in assets under management. Fossil fuel restrictions or divestment policies applied to $152 billion in money manager assets and $144 billion in institutional investor assets at the beginning of 2016.
• Social criteria, which include criteria related to issues such as conflict risk, equal employment opportunity and diversity, and labor and human rights, apply to $7.78 trillion in assets under management.
• An issue tracked for the first time this year was transparency and anti-corruption: money managers reported $725 billion in assets taking this criterion into account, while institutional investors reported $528 billion.
• Product-specific criteria, such as restrictions on investment in tobacco and alcohol, apply to $1.97 trillion in assets
• As shown by the number of proposals filed each year, disclosure and management of corporate political spending and lobbying is the greatest single ESG concern raised by shareholders, with 377 proposals filed on this subject from 2014 through August 2016. Many of the targets of these proposals are companies that support organizations that deny climate change science and undertake lobbying against regulations to curb greenhouse gas emissions.
In India, S&P BSE Indices has two investible indices in the sustainable investment space—namely, the S&P BSE CARBONEX and S&P BSE GREENEX
The S&P BSE CARBONEX seeks to track the performance of the companies in the S&P BSE 100, based on their commitment to mitigating risks arising from climate change in the long run. Index constituent weights are modified in accordance with the companies’ relative carbon performance, as measured by the level of their greenhouse gas emissions and carbon policies. S&P Dow Jones Indices has partnered with RobecoSAM, a global specialist in sustainability investing, to provide the carbon performance scores for Indian companies.
S&P BSE CARBONEX Performance
The S&P BSE GREENEX consists of the top 25 stocks in the S&P BSE 100 that adopt relatively better energy-efficient practices. Greenhouse gas emission numbers are provided by Trucost Plc, which is a global specialist in providing environmental data. S&P Dow Jones Indices recently acquired a controlling stake in Trucost Plc.
S&P BSE GREENEX Performance
Green investment in India may be in a nascent stage, but it is evolving and expected to gain momentum in the coming years. Many stakeholders, including the government, corporations, and market participants, have become environmentally conscious and are looking to integrate environmental aspects of businesses in their mainstream investment strategies. Green investment will not only encourage companies to have environmentally friendly policies, but also help ensure that they remain relevant in the long run to potentially create value for all stakeholders.
By Nishad MUKHERJI