Environmental and social challenges impact how we all live and work. Companies that are committed to addressing these critical issues will have better business opportunities in the future and be able to achieve higher returns for their long-term shareholders. Money is power, and investors can put their power behind what is important to them and choose to not invest in companies that are ignoring their duty to reduce their carbon footprint.
The number of investors that put their money into companies that make efforts to mitigate climate change or treat workers equitably without discrimination is increasing. Sustainable Finance, green investing, and green finance are some of the terms used interchangeably for this investing strategy.
Sustainable Finance is defined as making investment decisions that take into consideration environmental, social, and governance (ESG) issues as well as potential financial return. Transparency in ESG disclosures is key to making this form of capital management easier to analyze.
The recent climate crisis report by the United Nations is drawing more attention to this strategy of investing for impact, but it’s not a new concept. The California Teachers’ Retirement System formed a task force in 2007 focused on “managing sustainability-related risks, including climate risks, and taking advantage of appropriate sustainability-themed investments.”
CEO Larry Fink of BlackRock, said, “No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.”
Currently, there is no standard of disclosure for ESG related metrics. Large institutional investors are leading the drive to add ESG standards to criteria for capital allocation. The SEC is scrutinizing corporate disclosure practices to see if they are thorough and accurate, and based on reliable data. The World Resources Institute and WBCSD have created a joint initiative called The Greenhouse Gas Protocol, a standardized measurement of greenhouse gas emissions that can be used to report on efforts to reduce them.
In the United States, there is no consensus on what a sustainability activity encompasses. There isn’t a uniform dataset, no unified metrics, and analytical tools to assess climate risks. The quality of environmental data varies widely, and companies don’t have a reputable, market-accepted data provider to rely upon. Without some standard terminology and quality data, it will be difficult for companies to provide the ESG metrics that investors need to effectively monitor climate risk in their portfolios.
Sustainable finance is still a niche approach to investing, but it is likely to become more integrated and widespread in the future. Private companies are vital to the innovations that will mitigate climate change, and investors want to support that goal by investing. Without reliable, standardized metrics to compare efforts, investors are left to their own due diligence and the transparency allowed by the current companies’ disclosures.