Investing is about forecasting − identifying which companies are likely to be winners or losers in the race for success.
A responsible investor bases their investment decisions on information about environmental impacts, social responsibility and good governance, as well as their relation to return on investment.
Due to numerous responsibility-related trends, Neste’s sector has received close attention from investors. Energy companies in general are seen as key players in the transition to a low carbon society. An example of this is Norway’s decision in March 2019 that the country’s giant pension fund, with assets of the equivalent of almost one trillion euros, will divest from companies classified as oil exploration and production companies. This commitment was spurred by the overall economic risks that the oil sector poses for the Norwegian economy. Large integrated oil companies are not affected by the decision, however, as they are expected to grow significantly in renewable energy. More about the topic here.
Here are three reasons why responsible investing makes sense.
1. Responsible investing can give better returns
Responsible investment can yield better returns in the long run in proportion to the risks involved. Responsible investors are unwilling to choose between good returns and a more sustainable future – they want both.
In particular, investing in the most sustainable companies in each sector can yield returns that beat the overall market development. In addition, research has shown that successful engagement with investee companies to promote sustainability agendas can also improve investment returns, especially during the first year.
2. Risk management helps to avoid pitfalls
Investors are faced with emerging risks that can affect many companies and the stability of the financial system as a whole. Global risks, such as climate change and the sufficiency of water resources, concern entire industries and geographical areas.
Investors want to know about the climate impact of the companies they invest in, but they also want to know how climate change is likely to affect those companies financially. For this reason, Norwegian investors, amongst others, are now asking local companies to provide reports in accordance with the new framework of the Task Force on Climate-related Financial Disclosures (TCFD), which also highlights the economic impacts of climate change.
And when it comes to social responsibility, investors are turning their attention to how companies uphold the United Nations Guiding Principles on Business and Human Rights in their business operations and value chain. Human rights violations that come to light can also negatively affect the reputation of companies and drive away customers.
Data security is becoming an increasingly important theme for good governance. With digitalization, the continuity of operations of more and more companies are at risk from data security problems. Such problems can result in breakdowns in industrial production or on cargo ships, for example.
3. Identifying opportunities in emerging trends
Investment targets – that is, companies – can offer products and services that address global sustainability challenges. At the same time companies can also create opportunities for faster growth and more sustainable business.
Many investors are looking for new sustainable investment targets amongst the investment universe. This can promise good returns on investments, but also creates a new environment in which investors are increasingly willing to adopt the role of financiers of a sustainable future.
As a framework for defining responsible investment targets, the UN’s Sustainable Development Goals (SDGs) are commonly used. For example, the thirteenth of the 17 goals, Climate Action: take urgent action to combat climate change and its impacts, may mean investing in the production of technology related to renewable energy and providing products and services that increase energy efficiency.
Background: A new book presents the investor’s perspective
Sustainability offers opportunities for businesses and investors alike − both in terms of profits and promoting sustainability. A newly published book (in Finnish) on earnings and responsible investing written by me and Hanna Silvola, an associate professor at Hanken School of Economics in Helsinki, (Alma Talent, 2019) explains in concrete terms how investors and businesses can mutually benefit from these opportunities.
At the launch of the book in April, the urgency of these issues was well underlined by Mika Heikkilä, head of equities and an experienced portfolio manager at Taaleri, a Finnish wealth management and financing company: “Investors can exclude some investment targets, such as tobacco, from their portfolio, but no investor can divest from all the risks related to climate change.”