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The Sustainability Investments Revolution & its Impact on Climate Targets

Sustainability Investments Revolution & Climate Targets
Published on Jul 28, 2022

Today the quest for sustainability is more focused on and requires action on many fronts, ranging from changes to supply networks, operations, and manufacturing processes to business models. This sudden rise in sustainable practices across industries has given rise to a great cleanup. With tightening regulations, pressure from investors, and shifting customer preferences to sustainable practices, companies are striving to reduce the burden of their actions on the planet.  

For brands, the conventional goal is to achieve net zero in the holy grail. However, that is possible only through heavy investments on the one side and sacrificing margins on the other. But environmental responsibility has nothing to do with productivity and profitability. The way businesses perceive it is that sustainability is going mainstream, and they must incorporate components in their framework that align with and do not affect the many ways they operate. 

But the pressure points on businesses are getting more complex than ever before. Now it is no longer just about their financial performance but also about how they manage the business. But it is not that difficult. While there is no real pressure from the outside, it is the competition with industry that is compelling businesses to try and transform their operations faster. Companies are facing pressure from their colleagues as well as investors, as capital markets are beginning to ask questions, and consumers are beginning to criticize brands for not incorporating more sustainable products or practices. This is adding to the risk profile of businesses along with the unpredictability in supply chains or the regulatory changes that are coming toward business. 

long-term financial gains

The growth of sustainable finance, along with the increasing array of financial products, is attracting the attention of investors, policymakers, as well as various stakeholders, as it is showing its potential to deliver financial returns and aligns with societal values along with contributing to sustainability and climate-related objectives. 

Read more: ESG and Impact Investing: The Future of Responsible Finance 

What is Sustainable Impact Investing? 

As per the statement issued by Security and Exchange Commission chairman Gary Gensler, investors with over $130 trillion in assets under management are more focused on working with companies who are willing to reveal their climate risks. Today, more and more investors are expressing their interest in investing in companies that consider climate risks and that are aware of their sustainable and social responsibilities. They are soliciting details about a company’s relationships, along with strategies employed to conduct and govern their businesses. 

Sustainable Impact Investing

Sustainable impact investing is a strategy that aims to ensure that businesses produce positive social and environmental impacts along with their long-term financial gains. This socially responsible investment is also referred to as ESG investing as it considers the environmental, social, and corporate governance elements of a business. 

Types of Sustainable Impact Investing 

For portfolio investors, there are basically three distinct approaches to sustainable investing. They completely differ in their goals, strategies, as well as their effects on real-world outcomes. 

  • Maximizing risk-adjusted returns 

  • Aligning portfolios with values 

  • Active stewardship 

Aligning portfolios with values

Sustainable investing or sustainable investment strategies encompasses a plethora of strategies that can be employed in combination. Here are some of the common ones: 

  • Negative screening: It assists in eliminating corporations in industries that are deemed objectionable. 

  • Norms-based screening: This helps in eliminating companies that infringe the set norms, including the Ten Principles of the UN Global Compact. 

  • Positive screening: It is undertaken to select companies that exhibit strong ESG performance. 

  • Sustainability-themed investing: This is deployed to focus on funds for clean water or renewable energy. 

  • ESG integration: This involves ESG factors essential for fundamental analysis. 

  • Active ownership: This assists in engaging deeply with portfolio organizations. 

  • Impact investing: This type of investment targets companies that are driven to make a positive impact on an ESG issue while earning a market return. 

Read more: The Rise of Sustainable Finance: 2022 Impact Investment Trends 

conventional goal

The Rise of Sustainable Investing 

Assets in sustainable mutual and exchange-traded funds or ETFs have experienced rapid growth recently. From the beginning of 2020 to the end of 2021, assets in these funds grew by 52 percent, reaching $362 billion. Broadridge Financial Solutions stated that the ESG assets could likely reach $30 trillion by 2030. However, despite this growth, sustainable investing is still not necessarily yielding greater returns.  

While money is pouring into ESG funds, the world’s environmental and social crises are continuing to worsen. Is sustainable investing assisting organizations in helping combat climate change and advance a sustainable society? 

But the underlying concern is- what is being called sustainable finance? And what is expected of ESG investing? 

Investors are approaching sustainable investing as it accounts for and minimizes negative impacts as well as brings positive influences. There are different strategies, purposes, and approaches being incorporated to capture the true essence of sustainable investing or ESG investing. 

Read more: Connecting the Dots: Sustainability 2.0 & Green-Line Growth 

Sustainability in Fashion Industry 

Today many industries, as well as fashion brands, use their investments in low-impact materials innovation as a siloed strategy and marketing tool to protect their relevance and reputation, as well as to alleviate shopper guilt. With the potential to reduce emissions in line with industry-wide targets, brands need to understand the impact reduction potential of their strategies and implement renewable energy in the supply chain to achieve the quantifiable result of net-zero targets. 

Climate change solutions

With sustainability investing gaining momentum among investors, there is currently no public evidence why fashion brands are innovating and inventing components, including circular fiber, that is likely to have a significant impact on the emissions reduction strategies within the timeframe set for net-zero. With the focus shifting on decarbonization in the supply chain, fashion labels and other industries are employing more quantifiable and tangible impact reduction strategies in their operational framework. 

Does this signify that the investment in circular fibers is essential? Yes.  

Should it be the preliminary sustainability strategy of the fashion industry? Not necessarily. 

Then why should it be positioned as the primary strategy?  

Brands, for better or worse, tend to steer much of their investment dollars. And they work on solving the brands’ most pressing and public challenges instead of those of the industry that resides in the supply chain and makes the products. 

Businesses today are more focused primarily on marketing businesses; they often overlook the vast emissions that are generated from their supply chain process or in-house operations. Today the phase of fashion waste is not hurting brands the most but is also being perceived as a threat to their NetZero emission goals. While this sort of public waste is ugly, it is reputationally risky for brands who are investing heavily in circular materials from recycled clothing and promoting sustainability.  

Read more: Less Is More: Embracing the New Trends in Affordability and Sustainability 

Establishing a More Effective Sustainable Investing  

The diverse, inconsistent, unregulated practices of sustainable investing also pose a huge challenge to its efficacy. While there are no accepted definitions of what constitutes a sustainable investment, there have been no consistent regulations that force organizations to disclose their contribution to tackling the climate crisis. 

However, in March 2022, the Securities and Exchange Commission (SEC) proposed a new rule that would require all U.S. publicly traded corporations to disclose to the government as well as their shareholders about the risks from climate change that could affect their business. These proposed rules will help establish a structured framework for organizations to report climate risks in their annual reports, along with stock registration statements. These real regulations will help establish and address climate change along with the sustainable practices in place. 

When considering sustainable investing, it is vital to understand the three investing strategies and be realistic about the objectives, and set goals, along with strategies and outcomes. As an investor, it is important to do the homework in terms of how an organization is managed, what its climate goals are, and what strategies they employ to achieve them, along with how actively they engage with its management. However, what this ultimately indicates is that if businesses are not motivated to invest in solving their environmental and social impacts, investors will have to take the lead in their hands and drive ahead the objective of sustainability. 

With a presence in New York, San Francisco, Austin, Seattle, Toronto, London, Zurich, Pune, Bengaluru, and Hyderabad, SG Analytics, a pioneer in Research and Analytics, offers tailor-made services to enterprises worldwide.                

A leader in ESG Consulting services, SG Analytics offers bespoke sustainability consulting services and research support for informed decision-making. Contact us today if you are in search of an efficient ESG integration and management solution provider to boost your sustainable performance.