Socially Responsible Investing (SRI) is a type of investment that considers environmental, social and corporate governance (ESG) criteria. It aims to generate competitive long-term returns, but also a positive social impact. SRI is one of the fastest growing segments in the asset management industry, and it will continue growing in the years to come.
Socially Responsible Investing (SRI)
At the time of investing, SRI should be considered. An increasing number of investors continue to join this practice which, at the same time, provides more ESG data and analysis from different approaches. It entails from ethical and religious investors, who combine investment decisions with their own values, to financial institutions looking for business opportunities. BlackRock, one of the world’s largest funds, has decided to make asset allocation decisions based on ESG criteria.
The interest for sustainable investing is growing. Also, ESG data companies’ disclosure and the passing of time have gone hand in hand. Most companies in the global framework nowadays collect data on carbon emission, water use, health, and safety in their annual sustainability reports.
ESG risk ratings are key to value companies
A company’s exposure to ESG risks is crucial. Sustainalytics, a world leader company in ESG and corporate governance research and rating, offers ESG risk rating. It provides insight into why certain ESG issues are considered material for companies and how they are managing these types of risks.
Sustainalytics’ ESG Risk Ratings were developed aiming towards the evaluation of ESG risks companies might experience. It offers investors a clear vision of the company performance in relation to others. The ESG Risk Ratings are categorized across five risk levels: negligible, low, medium, high, and severe.
Climate change has become a new momentum for SRI.
Last November, the 25th United Nations Climate Change Conference was held in Madrid. The event was designed to take the next crucial steps following the Paris Agreement. That is: to limit global average temperature rise to well below 2°C and to pursue efforts to limit the temperature increase to 1.5°C.
Participant countries’ emission reduction plans were addressed during the conference. In order to achieve the set objectives, the business sector must get involved as well. Sustainable investments and ESG funds are key in that aspect.
Integration has become the most popular ESG investment strategy. It consists of a systematic analysis of ESG criteria when selecting investment assets. Integration has displaced the exclusion strategy, which is based on excluding from the portfolios those securities that are considered to have unethical activities.
Additionally, the institutional investor is the profile that stands out the most. It represents 75% of all investors, while the remaining 25% corresponds to retail investors.
ESG criteria have great relevance nowadays, so their continuous growth in both listed investment portfolios and alternative assets are expected. Not only investors, but companies themselves are considering ESG criteria when designing their strategic plans. Thanks to that, meeting the objectives set out in the Paris Agreement will become an easier task. It should also be noted that the returns generated by ESG investments are generally equal to or greater than those generated by other types of assets.
COVID-19 has become a challenge for companies, especially in relation to their stakeholders.
An uncertain future follows the COVID-19 crisis. Many analysts ask this question: are companies prepared to take care of their employees? The well-being and health of employees, clients, suppliers, etc. are, without a doubt, one of the first principles of a sustainable company. When investing in equities, large companies, credits, bonds, real estate assets, private equity or infrastructure regardless of the size of the company, ESG criteria shall be included in the investment analysis. 90% of companies in Spain are SMEs, of which only 10% have some type of ESG strategy.
In conclusion: to achieve a more sustainable world with more resources, including ESG criteria in all sectors and understanding their importance are needed.
Fellow Funders is committed to Socially Responsible Investing (SRI)
At Fellow Funders we 100% agree with the ESG investment philosophy and, although it is not yet explicitly reflected in our reports, we continuously seek that our projects follow certain ESG criteria regardless of the sector they belong.
Also, on May 20, the #14InvestorDayWebcast took place. Both projects participated in this event and their business strategies with positive social impact were able to be heard first handed.
Socially Responsible Investing has, without a doubt, a great future and at Fellow Funders we are determined to bet on it.