Responsible investment: trends and opportunities

Growing investor awareness of sustainability issues that influence the functioning and operations of businesses and societies has contributed to an upsurge in various responsible investing ideas.

Nowadays, investors are being offered more investment options through which they can manage their wealth while contributing to the common good of society and a much more sustainable environment.

The main pillar of responsible investing is ESG integration. Environmental, social and governance (ESG) issues can have a significant effect on long-term company fundamentals and performance. Assessing how companies manage their environmental impact, their relationships with stakeholders and their operations allows investors to identify potential risks and opportunities that financial markets may not be pricing appropriately.

Undoubtedly, for some time now, environmental issues have captured much of the attention of investors within the framework of responsible investing. Climate change, extreme weather events and biodiversity loss are always on the agenda of many organisations. Nature was also the theme of the day on the first Saturday of the United Nations Climate Change Conference (COP26) late last year, with discussions focusing on forests, land-use change and farming. Terrestrial sinks (forests and soils) absorb 24% of the CO2 emitted into the atmosphere, while coastal and ocean sinks absorb 17%.

It is also interesting to see that investors are also keen to see various companies adopting good social and governance practices. Clearly, we are moving away from an economy where labor was just a matter of cost. The social factor concerns how companies manage their relationships with their own employees, their customers and the communities in which they operate.

Companies that fail to properly manage social considerations are likely to be exposed to serious reputational and financial risks. In fact, the COVID-19 outbreak has led the public to be more concerned about social issues, typically supply chain disruptions due to lockdowns and cybersecurity risks brought about by the shift to remote working. These risks weigh significantly on the economy and corporate earnings, raising investors’ awareness of corporate social risk policies.

Corporate governance deals with the direction of a company, executive compensation, audits, internal controls, respect for shareholder rights, business ethics and culture, and diversity and the structure of the board of directors. Diversity, equality and inclusion on the company’s board of directors encourages innovative ideas and the sharing of best practices. Companies with good governance practices tend to reduce investor risk and improve the company’s financial performance, attracting investors. In fact, regulators, asset owners and investment consultants are focusing more on integrating diversity, equality and inclusion into their ESG screening processes and their active engagement to improve value. investors.

However, integrating ESG considerations into investment decisions can not only manage risk, but also open up new investment opportunities. In fact, it has been estimated that trillions of dollars are needed to decarbonize our economies. The stark reality of this situation is that governments around the world should finance less than a third of this expenditure. In turn, this pushes companies to adopt more sustainable management and financing methods while creating opportunities for investors to invest responsibly.

This evolution creates opportunities through the development of new sectors, technologies or business models.

Environmentally, climate change presents significant risks for companies that can impact stock prices, but also opportunities for companies that take action to reduce their carbon footprint. More and more companies are using renewable energy sources, the most important being solar, wind, geothermal and biomass. We are also seeing companies using green buildings – which have geothermal systems, solar panels and efficient water recycling systems. Other investment themes include sustainable water and wastewater management and clean transport.

The growing demand for healthcare services due to the aging population is driving interest in alternative modes of healthcare, namely artificial intelligence, big data, surgical robots and remote diagnosis. These alternative medical practices are meant to improve medical efficiency, reduce costs, and lay the foundation for a sustainable healthcare system.

COP26 also marked another milestone in the rise of sustainable finance and should continue to open up opportunities for investors. In 2022, a further acceleration in green, social and sustainability bond issuance is expected. Green bonds are a fixed income instrument issued by private companies, financial institutions and governments to finance projects with environmental and/or climate benefits. Developed countries have dominated the green bond market and still account for 75% of total volumes. However, activity is expected to shift to emerging markets, particularly Asia, providing opportunities for investors looking for green bonds to meet impact goals or to reduce their investments to those with high risks. related to climate change.

The commitment of countries around the world to transition to a zero-carbon economy opens new opportunities for investing in new asset classes such as sustainable infrastructure debt or natural capital, also known as alternative investments. This changes the focus of ESG investing which, until now, has been largely focused on equities.

In addition, a large portion of investments are expected to be in the developing world, which will result in a geographic shift of investments from developed markets. It is where the population is growing fastest, urbanization is deepest and economic growth is fastest. Therefore, this is where sustainable infrastructure will have the most impact.

To help investors explore these opportunities and make better investment decisions to choose the right investment products, regulators around the world have introduced various new regulations to strengthen companies’ ESG disclosure, reduce the risk of misinformation and facilitate the comparison of ESG measures between different companies.

On the accounting front, the International Financial Reporting Standards Foundation has also declared the establishment of the International Sustainability Standards Board by June 2022.

In light of these developments, investors will continue to make their investments more sustainable and mobilize the investments needed to finance a rapidly changing economy.

As we can see, this change creates opportunities through the development of new sectors, technologies or business models. However, there is no “one size fits all” solution, and therefore a financial adviser can provide you with innovative solutions that can support your ambition to allocate your investments in a more sustainable way, while seizing new investment opportunities at long term.

Speak to our relationship managers to explore sustainable investing opportunities that could help you achieve your goals. If you want to learn more about sustainable investing and ESG, visit our Investment Academy here.

Lisa Vella is CEO of HSBC Global Asset Management (Malta) Ltd.

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