A few preconceived notions about sustainable investment...

Isn’t there a cost to sustainable investment compared with more “traditional” investments?  This is a question that anyone might well ask. Most of the numerous studies conducted on the topic conclude at the very least that there is no significant link between SRI and performance. As such, making an “ethical” choice would not incur any cost or create any advantage for the investor from an overall perspective. To prove this point, one only need look at the change in a global equities index such as MSCI World and compare it to its sustainable version (MSCI World ESG Leaders[1]). The evidence is clear. The same is true for bonds: green, social and sustainability bonds have identical financial characteristics to conventional bonds from the same issuer, with the difference that they are issued for the purpose of financing projects with a positive environmental and/or social impact. 

So, the news is good! Analysing ESG (Environmental, Social and Governance) factors when developing portfolios is not detrimental to long-term performance and helps to redirect capital to more sustainable investment. This helps in achieving a better understanding not just of what businesses are doing, but also of how they are doing it. At ING, we believe that those businesses and countries that give due consideration to all society’s stakeholders will fare better in the long term. As with the traditional approach, however, a solid structural selection process is still required when choosing investments. 

Sustainable investment is generally associated with equities, but it doesn’t stop there! As well as the equities market, investors and issuers can also look to the fixed-income market, where three instruments have made a particular impact: green bonds[2], social bonds[3], and sustainability bonds[4]. The market for these instruments is growing strongly and issuers are making increasing use of them as an alternative to finance overall sustainable development objectives. Supervision to recognised standards ensures such instruments are credible.

One would think that the “E” for “Environmental” in the ESG acronym tends to overshadow the other two letters and indeed, most thematic funds focus on environmental issues such as water shortages or new environmental protection technologies. These environmental concerns are of the utmost importance, of course. With our planet increasingly exposed to the unpredictable consequences of climate change and resource depletion, urgent action is needed for us to adapt to a more sustainable model. As an example, around €180 billion of additional investment will be needed each year for the European Union to achieve the targets for 2030 set at the Paris summit, including a 40% reduction in greenhouse gas emissions. However, social issues and corporate governance are also increasing in importance. SRI adopts a wider vision of the world in which companies operate and evaluates investment opportunities in light of a number of factors, including compliance with labour law, staff training, management structure and independence of the board of directors.

The rationale for SRI is to contribute to funding the ecological transition and provide the capital needed to develop models with social and/or environmental benefits. This rational altruism aims to ensure that our development model is sustainable by completely rejuvenating it, as this is the only way to guarantee long-term sustainability for returns. In addition, the SFDR regulation, which came into force in 2022, will ensure greater transparency on sustainability issues in the financial markets in a standardized manner. It will harmonize the rules, ensure comparability and prevent greenwashing. Investors can then be assured of the real sustainability or not of their investments.

[1] Exposure to actors who display sound sustainable performance within their sector.

[2] With green bonds, the issue proceeds are used exclusively to finance projects with positive environmental impacts (renewable energy, energy efficiency, pollution prevention, clean transport, etc.).

[3] With social bonds, the issue proceeds are used exclusively to finance projects that aim directly to resolve or mitigate specific social problems and/or that target a positive social impact, specifically but not exclusively to benefit one or more target population(s) (access to basic services such as healthcare or education, job creation, food security, socio-economic empowerment, etc.)

[4] With sustainability bonds, the issue proceeds are intended to finance a combination of green projects (with a positive environmental impact) and social projects (with a positive social impact for a target population).

04/2023