Sustainable finance is becoming increasingly important as the world tackles climate change. Vera Spender Koubek outlines the difference between two key elements of ‘ethical’ investing and explains how Covid-19 has increased demand for green investment products.
What’s socially responsible investing?
Socially responsible investing (SRI) is very much about avoiding investing in companies that do not match the investor’s ethical values. This is often referred to as ‘negative screening’.
Traditionally this was tobacco or weapons, but more recently investors have eschewed mining and fossil fuel companies. We’ve also seen divestment from fast fashion for example because of worries about exploited labour in supply chains.
‘Positive screening’ is a more sophisticated strategy. This is about investing in companies that are taking positive action – typically renewable energy, green infrastructure or affordable housing.
What is ESG investment?
ESG stands for ‘environmental, social, governance’.
ESG has been around for some time as a reporting and risk management concept, but ESG investing is still fairly new. A BNP Paribas survey last year found that brand and reputation is still the main driver of ESG. Over a fifth of investors surveyed (22%) said all or most of their portfolio incorporated ESG.
It’s generally about funding a company’s transition to becoming sustainable, or more sustainable than they are now.
In ESG investing, we don’t exclude what may be considered ‘bad’ companies such as those who deal in fossil fuels.
The approach with ESG is to say, “You want to transform. Let’s help you finance that transformation, but we will check along the way that a material transformation is really happening.”
What’s the main challenge with ESG?
The landscape is moving really fast and one of the key challenges is getting the right data.
SRI investments are generally simpler to manage than ESG ones. Because if you say I don't want to invest in the tobacco industry, for example, that's a clear strategy which is easy to follow without much further data.
Once you move into ESG, it’s more complex. To start with, not all companies have the same goals.
Companies will typically conduct what’s called a ‘materiality assessment’ which determines their strategic focus. This is then followed by targets, and ‘key performance indicators ‘KPIs’.
There are so many different data points for analysts to process it’s potentially too big a task for a human. We may need help from artificial intelligence, and there are companies developing that technology too.
How has Covid-19 impacted sustainable investing?
The Covid-19 pandemic has been a major catalyst for sustainable investing, because people have become more aware of how things can go wrong.
Many sustainability professionals see Covid-19 as a ‘dry run’ for climate change. The pandemic has shown us very clearly that if nature doesn’t work, our social and economic systems don’t work either.
Net zero is not about ‘saving the planet’, as some people often suggest. It’s about saving humanity and preserving our way of life.
A visiting lecturer at LIBF, Vera Spender Koubek is a sustainability consultant, adviser and trainer. She has worked in financial services for 15 years, delivering multimillion-pound transformation programmes. In higher education she develops and leads courses in business, finance, leadership and transformation for sustainability.
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