There are terms like sustainable investment, impact investment and responsible investment associated with various investment approaches that take into account the various ESG (Environmental, Social and Governance) criteria. And, despite having heard them repeatedly, sometimes we fall into the error of using them incorrectly, ignoring the differences and nuances that we explain in this post.
Over the past ten years, the financial sector has realised the importance of fostering a change in mindset among investors and incorporating socially responsible criteria into their operations. The growing attention to sustainable and responsible criteria by various financial institutions and institutional investors reflects this new sensitivity, both in the activity and in the product offering.
Below in this post, we explain the characteristics of each type of investment and the differentiating nuances.
Sustainable Investment
Sustainable investing is a way of investing that aims not only to generate financial gains but also to have a positive effect on society and the environment. It specifically focuses on long-term sustainability, identifying companies that are leaders in sustainable practices using ESG analysis.
The goal of sustainable investing is to invest in companies that contribute to a sustainable future and can deliver stable and sustainable returns over the long term. This approach can include strategies such as thematic investing (such as in renewable energy or clean technologies) and incorporating ESG factors into traditional financial analysis.
Impact Investment
Impact investing goes further and seeks to generate positive and measurable social or environmental effects, in addition to generating financial gains. This method focuses on investments that aim to address social or environmental problems (such as poverty, climate change or gender inequality) in a direct and quantifiable way. The commitment of impact investments to measuring and making transparent the impact generated by investments sets them apart.
Responsible investment
Responsible investment refers to the practice of incorporating ESG criteria into investment decisions. The goal is to consider both monetary benefits and social and environmental effects. Responsible investment can refer to investments that are based on moral or ethical principles, such as excluding companies involved in weapons, fossil fuels, or tobacco, and instead opting for companies that have more sustainable practices and are corporately responsible. It focuses on reducing risks and ensuring that investments are moral or ethical.
Each of these methods represents a movement towards greater awareness among investors about the effects of their investments, both in terms of profitability and in terms of social and environmental impacts.
The rise of sustainable investment and the ESG standards that regulate it
Today, ESG (environmental, social and governance) criteria play an important role in the investment decisions of a large part of the financial market. ‘Sustainable and responsible investment’ (SRI) is the type of investment guided by ESG. It is distinguished from other types of investment by incorporating these criteria into the processes of research, analysis and selection of securities for an investment portfolio.
The increased interest of institutional and individual investors in SRI coincides with the explosion of initiatives promoted by the international community that seek to promote social and environmental policies that favour the transition towards a sustainable economy.
Among the most relevant events are the Paris Agreement on climate change, supported by 195 signatory countries, and the publication of the United Nations Sustainable Development Goals (SDGs), which bring together 17 objectives to achieve sustainable economic growth. The rise of SRI would not be understood without taking into account this effort, public and private, national and global, to promote sustainable development.
From this perspective, which is respectful of the environment and people, to help create a more sustainable future, initiatives such as the Principles for Sustainable Investment (PRI) were promoted, driven by the United Nations and established by a network of investors who seek to put these premises into practice;
- We will incorporate ESG issues into investment analysis and decision-making processes.
- We will be active owners and incorporate ESG issues into our ownership practices and policies.
- We will seek appropriate disclosure of ESG issues by the entities in which we invest.
- We will promote the acceptance and implementation of the Principles in the investment sector.
- We will work collaboratively to increase our effectiveness in applying the Principles.
- Each of us will report on our activities and progress towards implementing the Principles.
The PRI defines responsible investment as a strategy and practice that incorporates environmental, social and governance factors into investment decisions and asset management. It also aims to improve conventional methods of financial analysis.
In this context, a new regulation on the transparency of sustainability information for financial products came into force in March 2023 “Regulation on disclosure of information related to sustainability in the financial services sector, SFDR, Reg. EU 2019/2088”. This regulation allows us to be aware of the level of ESG involvement.
What is the SFDR Regulation on sustainability?
The Sustainable Finance Disclosure Regulation ( SFDR ) is a European regulation that has an impact on all financial institutions that sell investment assets in any nation in the Eurozone.
The main objective of the SFDR Disclosure Regulation is to ensure that asset managers and entities classify their financial investment products, such as funds, within the level of sustainability that corresponds to the established criteria. In other words, to establish specific rules that establish what and how should be communicated in this regard to make the sustainability profile more understandable.
Information on sustainability risks, as well as their sustainable policy, objectives and methodology, must be reflected in prospectuses, websites and periodic reports. The CNMV has the power to apply the corresponding sanctions if this regulation is not complied with.
