Potential pitfalls & opportunities to consider when engaging in sustainable investing across the Americas
Sustainable investing is a challenging topic on agendas everywhere. In this blog about ESG challenges, trends, and insights we took at what key challenges the investment sector is facing.
Here are just a few of those challenges:
Higher expectations on sustainability from stakeholders
Complex frameworks, increasing legislation and regulations
Low engagement from the own company
Insufficient knowledge about the topic
How to raise and improve ESG performance
Assessment and comparability of the ESG data
A rising need to manage portfolio impact and risk
Trends in sustainable investments
Investors prioritize sustainability
Sustainability is a priority for many investors and a majority tracks ESG metrics in their investment portfolio. However, many of them still lack the processes to integrate sustainability KPIs in a successful way meaning there’s clearly still a gap between the ambition to work with ESG and deep integration of ESG and sustainability into existing and new portfolios.
It is clear that Environmental, Social, and Governance (ESG) data is now being used to communicate impact-driven KPIs – rather than just profit-driven data. ESG data in recent years has proven to drive both, since growing interest from investors has affected the global flow of capital towards a more sustainable landscape for investments.
ESG drives performance
A key learning in recent years, helped by the search for resilient investments throughout COVID, is that ESG data actually helps to drive performance. For companies to lead the way in sustainable investing, the link between quality ESG data and real outcomes is clear and is a defence against greenwashing.
Competitive advantage through ESG investment strategies:
Align your portfolio. Standardization is essential for comparing data/benchmark your portfolio with reporting frameworks that will make it easier for stakeholders to access, interpret and compare relevant data.
Share information publicly, in a transparent manner, to actively work against greenwashing.
Maintain the highest reporting standards within frameworks, such as the International Financial Reporting Standards Board (IFRS), the International Sustainability Standards Board (ISSB) and Data Convergence Project (ILPA).
Prioritize what's relevant
But with geopolitical concerns being a key feed into the narrative, it has never been more important to bring sharp focus into relevant data. While standardization is important, all industries and sectors can't adopt the same methods without risking missing out on vital data and reducing the opportunities to make an actual impact. Determining which of the ESG-data factors are the most relevant will give more accurate results. For example “A tech company needs to be assessed against very different factors to a manufacturing company in order to determine the real ESG performance of each. The ability to measure relevant ESG performance is essential to improve the sustainability performance of your portfolio”.
Potential pitfalls to consider when engaging in sustainable investing across the Americas
When it comes to sustainable investing in the Americas, it's important to be aware of potential pitfalls. Different countries have different environmental laws and regulations, so what might be considered sustainable in one country could be entirely different in another.
Additionally, there is sometimes a lack of consistent reporting on sustainability practices, which can make it difficult to accurately assess investments. It's important to do your due diligence and research companies and countries thoroughly before investing, so AM’s can make informed decisions and avoid any potential negative impacts on the environment or society. Nonetheless, sustainable investing can be a great way to support positive change and drive important progress forward.
As we have seen, there are different types of sustainable investment strategies employed across this sizable and diverse region which have inherent strengths and weaknesses. Therefore, it's important for investors to be aware of these when considering their individual portfolios. Through research and data analysis, investors can analyze the risk-return profile of potential investments most suited for them.
Engaging in upcoming conferences such as RAOGlobal - the Americas 2023 can provide a great opportunity for investors to understand issues like foreign exchange risk, regional issues affecting returns, due diligence processes among others which will allow them to make informed decisions about their investments.
The importance of communication
Conversation and collaboration are clearly key elements on the road towards more sustainable investments. It is important to not only gear towards what investors and regulators want to know, but also identify and acknowledge those who affect and are affected by a company’s actions. This plays a vital role in shaping a company's reporting practices and rather than see it as a burden, those at the front see it as a compelling competitive advantage.
Transforming existing companies
It is important that companies understand that there is a difference between investing in an impact fund and investing in an ESG committed to the fund. Investors need to understand how and why to invest in solutions that address the global challenge, but also need to assist companies on their journey to becoming more sustainable. Transforming existing companies is just as important as investing in solutions that address the global challenge.
