Sustainable investing is becoming increasingly popular, as investors look for ways to make a positive impact on the world while also making a profit. But what are the risks associated with sustainable investing? In this article, we'll explore the potential financial and legal risks of sustainable investing, as well as the potential rewards. Financial returns are one of the main benefits of sustainable investing. A Harvard Business School study found that companies that established organizational systems to monitor, manage, and communicate performance related to environmental, social, and governance (ESG) concerns in the early 1990s outperformed a carefully matched control group for the next 18 years.
Many different studies have found positive links between strong financial performance and strong performance on relevant ESG topics. The Securities and Exchange Commission (SEC) recently voted in favor of a proposed rule requiring companies to disclose their climate risks, as well as data on greenhouse gas (GHG) emissions, in annual filings with the SEC. This will require companies to track, manage and plan their environmental data and consider the risk of transition in a more structured and systematic way. In addition to managing clients' money and advising them on sustainable investment strategies, Cornerstone dedicates much of its energy to due diligence in the asset management industry as a whole.
Executives have long been concerned about investor pressure over the disclosure of ESG information, but established legal frameworks are only now starting to take effect in some jurisdictions. Investments that lack a robust ESG program are not considered progressive or risk-aware, which can damage perceptions and affect the value of the investment. As interest in impact investing increases, investment professionals must become experts in environmental, social and governance (ESG) factors and how they affect a company's risk profile.
Erika Karp is skeptical of ESG rankings and reports that give huge numbers on the size of the sustainable investment industry.Many investors would consider good governance to be a standard requirement for their investments.
Environmental and climate issues are becoming more easily accessible investment opportunities, given the growth of green assets (paywall). The “S”, for social, is more difficult to understand, but it offers the greatest potential for impact. An evolving view of fiduciary duty means that many investors are now considering ESG factors when making decisions about investments. Jay and his colleagues at Cornerstone are working to find solutions to each of these three challenges, such as Owning Impact, an executive course that helps family foundations create socially conscious investment strategies; the Climate Pathways project, which helps key decision makers adopt evidence-based climate policies; and the Aggregate Confusion project, which helps companies evaluate sustainability performance.
The company's CEO Larry Fink has long been an advocate for sustainable investment and has been striving for several years to fully integrate ESG considerations into the company's investment strategy. Asset managers around the world are gushing about a wave of millennial investors willing to invest their money in sustainable investments. However, George Serafeim, professor at Harvard Business School and one of the world's leading experts in sustainable finance, warns that the ESG investment industry is developing “in a very disorderly way”. The quality of the analysis used to determine if an investment is sustainable is “too poor and, in general, the data used by the industry is poor” he added. Sustainable investing can be risky but it can also be rewarding. Investors should be aware of both potential risks and rewards before making any decisions about their investments.