Individual investors are always looking for new ways to invest their money. Their concern is not just pertaining to pure capital returns alone but also the robustness of their investment.
Future-proofing the investment is a concern from the investors and this is what ESG aims to do as well. E (Environment) S (Social) G (Governance) investments have enabled increased performance, better returns, improved risk management, and more importantly pass on your values that can drive positive change. It’s a myth that investors should give up on returns when invested sustainably. Constant monitoring stress testing your portfolio for emissions (CO2) and climate change risk will enable you to quickly react to risks and grab the opportunities.
Why emissions matter
Investors can have both ethical and economic reasons for concerns about carbon footprints. From an ethical perspective, it is generally recognized that GHG emissions are contributing to global warming and climate change. From an economic perspective, companies that are big emitters of GHGs could see their costs raised by regulations. For example, Car manufacturers are penalized in the EU for the CO2 emissions of their portfolio on the streets. EU tightened the screws by making the funding costs costlier for companies whose GHG emissions are on a higher scale. Hence it’s imperative, that long-term systematic risk is impacted by Company’s CO2 emissions.
Green Washing and Regulatory kick-back
“Greenwashing is when firms and funds give misleading claims about their products or ESG credentials,” says Ben Colton, global co-head of asset stewardship for State Street Global Advisors. “It misdirects capital away from the goals and preferences of the investors who choose sustainable funds.” Greenwashing threatens to undo all the good work and progress that has been made so far in responsible investing.
Greenwashing is becoming a big issue as vast amounts of cash flow into funds that specialize in companies viewed as having sustainable business practices. In the second quarter alone, $71 billion flowed into such funds around the globe, bringing total assets to $1.1 trillion across 3,432 funds, according to data from Morningstar Inc. A third of climate funds sold in the UK are invested in oil and gas companies, according to research that highlights concerns that investors could be misled by sustainable investment products.
The EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March, is designed to drive capital toward sustainably-oriented investments. It is widely considered the broadest regulatory action in sustainable finance to date. The SFDR will act as a mandate for participants in financial markets to “do no harm” to society and the environment while also safeguarding investors from exposure to undue risk stemming from poor ESG positioning of their investments.
Measuring and Beyond
Individual investors need to know full disclosure of how sustainable their current investments are, and should be provided adequate advice on how to mitigate risk on their existing portfolios. Investors need to be equipped with the right and reliable information about their portfolio ESG performance for them to be able to take decisions. At the heart of sustainable investing lies a fundamental question, What would our economy look like if we fully valued all forms of capital, including human and natural? – Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution, 1999. The bottom line is: Can we still afford not to invest sustainably?
SFDR Draft Principle Adverse Impacts Indicators: Company-Level Data Availability
Writer is Tanuj Pasupuleti, who currently advises Lehti works for Santander Consumer Bank and has over 10 years of experience in Consumer and Retail Banking. [email protected] | +49 151 2202 7853
LEHTI is helping empowering individual investors to measure CO2 emissions of their investments by democratizing the access to the carbon footprint data of their portfolios. LEHTI is not only providing ways to offset the emissions and make the investments more environmentally friendly but also provide advice on greener stocks to invest in. Lehti would cordially invite you to engage us at our DEMO BOOTH ON DAY 2 OF SLUSH 2021
