As the world is pressured by the urgency of addressing social and environmental challenges, the role of sustainable finance has become increasingly vital. This can be seen in individual investors’ evolving expectations and priorities, as a remarkable 80% now believe that market rate financial gains can be balanced with a focus on sustainability, with the same percentage also considering a company’s efforts to reduce its climate impact when making investment decisions, according to a recent Morgan Stanley report. This interest is driven by new climate science findings and the strong performance of sustainable investments: In 2023, sustainable funds outperformed traditional funds, delivering an overall return of 12.6%, which is almost 50% higher than that of traditional funds.
Yet the growing demand for these investments has brought with it a greater degree of scrutiny and accountability. This contributed to a decline in global sustainable investment assets, as measured by the Global Sustainable Investment Alliance in its most recent report, which found that these assets fell to US $30.3 trillion in 2022, a 15% decrease from 2020. The report attributed this decline to methodology changes made by Alliance member US Sustainable Investment Forum, which tightened its standards regarding what qualifies as a sustainable investment in an attempt to address rising concerns about greenwashing.
These trends reflect a maturing industry that is now demanding greater transparency and clarity around sustainable investments. They also highlight the fact that challenges related to greenwashing present a real threat to the growing momentum of sustainable investing.
The Challenges of Transparency and Greenwashing
Investors’ concerns about the transparency of sustainable investments are valid: Many businesses and investors have increased their greenwashing practices, often providing vague or false information about the social and environmental impacts of their operations. For instance, a 2023 report found that 54% of companies in North America, Asia and Europe misrepresented their contributions to greenhouse gas emissions, global pollution and other climate change-related issues. It also found that greenwashing instances by global banks and financial service companies increased by 70% between 2022 and 2023.
Investors have taken notice of these practices, with large majorities citing potential greenwashing and a lack of trust in ESG reporting data as major barriers to investing in sustainable funds. The absence of standardized reporting and measurement approaches within the ESG frameworks exacerbates this problem, leading to issues for investors when comparing and assessing different companies’ performance.
Further complicating matters, ESG assessments, which essentially focus on financial materiality — i.e., how environmental and social issues can influence a company’s financial performance — are often insufficient for making trustworthy, informed investment decisions. They typically neglect impact materiality, which evaluates how a company’s actions and strategies affect society and the environment at large.
Due to these issues, many investors feel inadequately supported in their efforts to invest sustainably. The Morgan Stanley report mentioned above found that a majority of global investors (52%) report having limited knowledge about how to start investing sustainably, while 43% say they lack sufficient financial advice. And these percentages are even higher among investors who report that they’re “very interested” in sustainable investing.
It’s clear that there’s a significant need for better guidance and support in sustainable investment decisions, combined with a growing demand for reliable data on companies’ true impacts.
This is precisely the challenge Impaakt is addressing with the launch of “How Sustainable to Me?” (HSTM), a groundbreaking free tool that gives individuals the power to scrutinize the social and environmental impacts of the companies they invest in. In a landscape often obscured by greenwashing and a lack of transparency, HSTM aims to provide a beacon of clarity for retail investors who seek to align their investments with their personal impact criteria.
Through HSTM, we’re providing a comprehensive framework to evaluate companies’ genuine sustainability performance and impact, free from the influence of greenwashing tactics.
Impaakt’s Wiki of Sustainability
HSTM is driven by Impaakt’s Wiki of Sustainability, an open-source database that relies on transparent research, simplified language and a stakeholder-focused approach to impact measurement, in contrast to traditional impact data models and assessment methodologies.
Since 2018, this database has been drawing on the work of civil society and the platform’s 60,000 contributors, to document, analyze and assess the environmental and social impacts of over 5,000 companies. The data is mapped against various frameworks, such as the Sustainable Development Goals, the Investment Leaders Group themes and Impaakt’s Products vs. Processes categorization. A team of reviewers strictly verifies the research to ensure accuracy and reliability.
Drawing upon a diverse array of impact metrics, the Wiki of Sustainability goes beyond ESG data, which often focuses on processes, policies and risk management: Instead, it gathers impact data focused on the most significant impacts a company is making on the environment and society.
This open-source wiki provides investors with a nuanced and granular understanding of companies’ sustainability impact, transcending the limitations of “one-size-fits-all” sustainability data.
Empowering individuals to invest in their convictions
Building off this wiki, HSTM aims to shake up the sustainable finance sector by giving retail investors (instead of their investment managers) the power to decide for themselves what constitutes a sustainable investment.
To generate bespoke sustainability scores, HSTM allows individuals to input their sustainability preferences for six environmental and social topics. Whether one prioritizes climate change, biodiversity or poverty alleviation, to name a few of these impact topics, the tool provides tailored insights that resonate with each investor’s unique perspective.
Once investors have specified the importance of each impact topic, HSTM uses a fast, automated process to generate a list of companies that align with their values. They’ll receive a customized list of “heroes” and “villains” — i.e., companies that do or don’t align with their values — to explore. Additionally, investors can scan their existing investment portfolios to highlight the true sustainability impact of their holdings. Whether they actively manage their investments or have a 401K on autopilot, the tool provides investors with actionable insights that enable them to easily build an exclusion list of companies they can send to their investment manager, who can adjust their portfolio accordingly.
By enabling informed decision-making, HSTM empowers investors to reallocate their capital towards companies that uphold robust environmental and social standards, thereby driving positive change from the bottom up.
A Call to Action for Business Leaders
As stakeholders in low- and middle-income countries (LMICs) continue to navigate the complex interplay between economic development and sustainability, the role of business leaders in driving positive change cannot be overstated.
By accessing robust impact data on major companies with full transparency on the impact assessment methodology, LMIC business leaders can also use HSTM to understand their organizations’ sustainability footprints better, identifying areas for improvement and innovation. Anyone can browse HSTM’s impact data, compare it against several frameworks, and identify relevant key performance indicators and impact metrics for a given industry. In addition, the tool allows users to access impact analyses and rankings, to easily identify the best-in-class companies in terms of sustainability, and the ones that still need to make significant improvements.
By enabling access to this comparative data, HSTM catalyzes actionable change within LMICs and beyond — whether it involves enhancing supply chain transparency, promoting renewable energy adoption or fostering inclusive business practices.
Paving the Path Towards Sustainable Finance
In an era of unprecedented environmental challenges and social inequities, the imperative for sustainable finance has never been greater. Yet the path to genuine sustainability is filled with obstacles, from greenwashing and soft regulations to the lack of standardized impact metrics.
However, we now have access to tools like HSTM that allow people to understand the impacts of their investments, and directly hold companies accountable for their actions. This makes room for a new era of democratized sustainability, where individuals hold the power to drive meaningful change and contribute to a more equitable and environmentally conscious future.
By embracing sustainable finance and investing in companies that prioritize social and environmental responsibility, each of us has the opportunity to become agents of positive change. Let’s seize this moment to align our investments with our convictions, knowing that together, we can build a more sustainable, just and prosperous world for generations to come
Shaan Madhavji is the Community and Engagement Manager and Anna Helena Chaim is the Marketing and Communications Analyst at Impaakt.
Photo courtesy of Medienstürmer
Publisher: Source link
