Sustainable investment is a growing trend in the financial world, but it is important to understand the risks associated with this type of investing. A sustainability risk is an environmental, social or governmental event or condition that, if it occurs, could cause a real or potential negative material impact on the value of investments. A Harvard Business School study found that companies that established organizational systems to monitor, manage and communicate performance related to ESG concerns in the early 1990s outperformed a carefully matched control group for the next 18 years. This indicates that there is a positive link between strong financial performance and strong performance on relevant ESG topics. The Securities and Exchange Commission (SEC) recently voted in favor of a proposed rule requiring companies to disclose their climate risks, as well as data on greenhouse gas (GHG) emissions, in annual filings with the SEC.
This will require companies to track, manage and plan their environmental data and consider the risk of transition in a more structured and systematic way. As interest in impact investing increases, investment professionals should become experts in environmental, social and governance (ESG) factors and how they affect a company's risk profile.
BlackRock
CEO Larry Fink has long been an advocate for sustainable investment and has strived for several years to fully integrate ESG considerations into the company's investment strategy. Investments that lack a robust ESG program are not considered progressive or risk-aware, which can damage perceptions and affect the value of the investment. Therefore, the value of the investment and the income derived from it will vary and the amount of the initial investment cannot be guaranteed. While there is a pressing need for data related to ESG criteria to guide investment decisions, much of the data and tools available do not provide asset managers with the information needed to invest and manage their portfolios with confidence.Whenever advice to asset management companies on sustainable investment processes is mentioned, these opinions are met, at best, with an empty eye and, at worst, with a certain amount of disdain. An evolving view of fiduciary duty Many continue to assume that sustainable investment involves giving up some financial gain, and many investors have neglected ESG considerations for fear that they will negatively affect final returns. It is important to understand that sustainable investment strategies can be interpreted differently. It is essential for investors to be aware of all potential risks associated with this type of investing before making any decisions.
