Sustainability Reporting For Investors

Why Invest Sustainably?

ESG reporting and sustainable investments are deeply linked. But why is it paramount to start investing sustainably?

“The Sustainable Development Goals (SDGs) are fully synergistic with our investment objectives.” 1

Western Asset

Green Is The New Black – The 17 SDG Goals

A trend that has been taking shape lately is that not just business ventures, but investors, too, are now concerned with measuring the environmental and social impact of their investments. This is what has been observed in studies such as the third Sustainable Signals survey conducted in 2019 by the Morgan Stanley Institute for Sustainable Investing. But the connection between investments and environmental, social, and governance issues, namely the fact that EGS issues can impact investment portfolios directly, affecting their performance, had been acknowledged back in 2006, when the Principles for Responsible Investment (PRI) were first brought forth.


The United Nations-supported PRI grew to be the world’s leading proponent of responsible investment, and its principles continue to help investors materialise and internalise non-traditional financial factors such as climate change- and human rights-related matters. Eventually, they should enable sustainability. In this respect, the most incisive roadmap designed to pave the way for a globally sustainable future is the Sustainable Development Goals initiative (SDG), a collection of seventeen goals launched in 2015 by the General Assembly of the United Nations.

Past Economic Growth & Bad Investments

In one of their 2017 papers, the PRI elucidates its reasons why – as investors become more proactive, seeking products and solutions in line with their interests – other investors and companies should also seriously take into account the issue of sustainability. They acknowledge the detriment of some past as well as current business practices aimed at the achievement of business growth, and they condemn blind ambition at the expense of the environment and the people. They also see the potential behind the SDGs as instruments necessary to reach untapped markets and geographies, and to develop innovative financial products:

“The way that past economic growth has been achieved cannot be maintained: it has been responsible for an expanding list of environmental and social burdens. With many of the catalysts of past growth (e.g. use of fossil fuels and rapid urbanisation) no longer sustainable in their current form, future growth is likely to be much slower and more erratic over the next 30 years than over the past 30.” 2

“Inefficiently allocating capital to companies with high external costs, such as those engaged in highly-polluting or socially disruptive activities, can over time lower asset values, reducing returns to investors: one company’s externalities can damage the profitability of other portfolio companies and overall market return.”3

The Current Sentiment Towards Sustainable Investing & The Ongoing Risk Of Trade-Off Perceptions

Sustainable Investment

Sustainable investing is becoming more complex by the hour. While it is now part of mainstream financial strategy, and general interest around the subject continues to rise, the 2019 survey “Sustainable Signals” revealed that there is still a gap between sheer interest and the actual adoption of sustainable measures. This could have to do with the conventional perception of sustainable investing, as, traditionally, investors have shown a reactive engagement rather than a proactive approach to the issue:

“Investors have traditionally understood ESG engagement as either a tool of (ESG) risk management (i.e. as a way to make sure ESG risks are adequately managed by companies) or as compliance-driven (i.e. an effort to improve business conduct and bring a company back to compliance after they showed failure to uphold certain ESG standards). In this way, ESG engagement has usually been reactive rather than proactive and focused on the current, specific risks faced by a particular company as a result of negative media attention or whistle-blowing.”4

Barriers

According to the 2019 Morgan Stanley poll, such concerns even represent the major barrier against the full embracement of sustainable measures. This was demonstrated by the fact that, when asked how significant the four given barriers to including sustainable investing in their portfolio were, seventy-nine percent of surveyed investors indicated concerns over performance as the trickiest issue standing in the way of financial return. Other barriers were seen as less of a threat, and they included: the lack of available financial products for the investors´ portfolios (65%), time and effort required to understand sustainable investing (64%), and lack of financial advice (57%). However, the survey revealed an even more worrying truth as it uncovered how perceptions of financial trade-offs strengthened from 2015/2017 to 2019. The percentage of investors who still believe they must choose between financial gains and sustainable action plans rose alarmingly from 54% to 64%. Yet their fears have no reason to be: These concerns persist despite studies that show they are unfounded.”6

Trade-Off Perceptions

Some investors are still skeptical as they are convinced that investing for social and environmental impact entails financial sacrifice. Even though sustainable investing keeps gaining traction, concerns persist over investment performance.

“Perceptions of trade-offs linger, with 64% agreeing that investors must choose between financial gains and sustainability.” 5

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