Green or sustainable funds are collective investment undertakings that choose their portfolio assets based on environmental, social and corporate governance (ESG) criteria. Their high profitability and social reputation are leading these investments to become predominant in the market. More and more people are choosing to invest in green.
Markets and financial institutions have a high capacity to influence where, when, how much to invest and at what price, even if their role is that of intermediaries. Sustainable finance has the ability to channel savings by influencing the type of development sought. In the case of sustainable development, it takes environmental, social and economic aspects into account when managing portfolios.
It is a finance that uses the instruments of the financial world with a clear objective. It wants to contribute to economic growth together with a more humane development, in which a balance is established between economic, environmental and social aspects.
Sustainable and Responsible Investment (SRI) is an investment philosophy with a strong long-term focus. It integrates environmental, social and governance (ESG) aspects into the research, analysis and security selection process of an investment portfolio.
Investing green means investing responsibly
The portfolio of an SRI fund can be constructed using exclusion criteria for asset selection (e.g. arms or hydrocarbon companies), inclusion criteria for companies or governments with proactive social responsibility policies, or even by choosing specific themes related to ESG criteria (e.g. climate change or water). It is therefore a more responsible type of investment.
Several European credit institutions are playing an important role in the development of the sustainable bond market at national and European level. In 2020, Europe launched a public issue of social bonds to mitigate the economic effects of COVID-19. The funds raised are used to finance the operations of the self-employed, SMEs and companies to mitigate the economic and social impact of the pandemic.
Financing responsible businesses
By investing in a sustainable fund, you indirectly finance socially responsible companies in return for a return, rewarding their performance and contributing to their growth.
The investment fund industry is adapting to a new economic environment. Faced with a scenario characterised by the search for sources of profitability in an environment of low interest rates, a new way of understanding business following the irruption of new technologies and increased social awareness, the asset management industry is full of challenges and opportunities. Sustainable investment funds are seizing these opportunities and addressing the challenges of our world.
The Norwegian Sovereign Wealth Fund
One of the pioneers of this type of investment is the Norwegian Sovereign Wealth Fund. It is a public pension fund of the Norwegian government, established in the 1990s. This fund is independent of the government itself and invests the profits, i.e. the surplus that the Scandinavian country earns from the extraction and sale of oil.
Sustainable pension funds responded to an increasingly widespread need: the pursuit of economic profit from financial investments had to be complemented by a social objective. The design of new savings products is therefore based on the incorporation of a sustainability profile.
To meet customers’ expectations, companies offering these plans use very strict socially responsible investment criteria to strike a balance between profitability and social impact.
An example of this is green bonds or the investment of income in sustainable companies operating in the fields of renewable energy, green food, waste recycling, sustainable technology, non-polluting transport, etc.
When it comes to evaluating portfolios and assets, there is much more information than in traditional investments. With extra-financial investment, so-called intangibles are evaluated: the company’s way of doing things, management tools that avoid social and environmental impact, control of risks related to good governance, regulatory compliance, ethics of directors, etc. This type of investment benefits the companies in which one invests over time, which then seek long-term profitability and sustainability: this is why some common investors are pension funds or reserve funds in some countries.
Investing in green with funds: the best way to start helping the planet by multiplying your savings.
Through green investments, companies obtain the resources to implement projects that enable sustainable development. Investing in investment funds is one of the best ways to invest because:
- You do not need to have financial knowledge, as the fund managers take care of selecting companies for you and deciding when to buy and when to sell;
- From a tax point of view, it is more attractive, as you can defer tax payments;
- Easy monitoring of the investment;
- Control by regulators who can avoid some risky decisions;
- It is not necessary to have large capital to start investing;
- Diversification: with a few funds you can be diversified across half the world and a multitude of sectors;
- Adaptable to any investor profile: you can choose between equities, bonds or both;
- Commissions: Give you access to products where, despite investing with a small capital, the commissions are not high.
What does the future hold for these funds?
The future of SRI is broad and prosperous. There are regulatory advances in the EU, the US and green shoots in other markets such as China. This will favour the development of these investments. One example is the EU’s sustainable finance policy. More and more investors are looking for this long-term stability. It is part of a differentiation strategy and there are already insurance companies, banks and asset managers that incorporate this management into their mission and vision to attract new capital to more responsible investments, as well as to facilitate the financing of those companies that have a vocation for environmental and social sustainability’.