Sustainable investing is growing in importance as companies consider ESG factors and various stakeholder groups in their business model. Green bonds, negative screening and ESG integration are key themes in the future of investing.
A new trend emerges in the investing world as more and more companies screen their investments based on Environmental, Social and Corporate Governance (ESG) factors. Effectively it means that companies invest more funds in projects deemed to be in line with ESG principles. The societal impact of an investment rises in importance, as does the number of thematic funds that only channel investments to certain projects.
Is it not only private companies that favour ESG investing. The European Central Bank (ECB) wants to reduce its carbon print to zero by investing part of its profits into green projects.
Negative screening refers to the process whereby investors avoid companies deemed to be having a detrimental effect on the environment. An example of negative screening is not investing in fossil fuel companies.
As people become more aware of climate change and its impact on the planet, one way of raising awareness and reducing the dependency on fossil fuels is to avoid investing.
Green Bonds and Corporate Governance
The concept of green bonds is not new, but has gained more traction of late. Companies find it easier to raise “green” capital if the proceeds are invested with ESG considerations in mind.
It is not necessary for the company to be directly involved in the production of green energy, for instance, to raise green capital. A company may decide to borrow green capital and invest it in other projects developed by other companies to reduce its own carbon footprint.
Amazon is a prime example. In order to reduce its worldwide carbon footprint, Amazon is one of the world’s largest investors in green energy projects. In other words, it tries to compensate for the environmental impact of its business, thus raising awareness in the public’s eyes.
The movement is still very much in its infancy. Corporations are shifting their horizons from maximising shareholder wealth to considering various stakeholder groups so that the ultimate beneficiary is society at large. A 2018 report showed that close to $20 trillion was invested globally in ESG projects, highlighting the growing interest in green investing.