What is Sustainable Investing?
Sustainable investing involves allocating capital to enterprises that prioritise financial returns alongside positive societal impacts and ethical principles
Sustainable investing involves allocating capital to enterprises that prioritise financial returns alongside positive societal impacts and ethical principles. The emphasis on ethical considerations in investing is not a recent development. Ethical consideration has evolved alongside societal values and norms over time, extending beyond pure financial gain to encompass considerations such as human dignity, risk management, and societal impact.
Corporate sustainability starts with a company’s value system and a principles-based approach. Sustainable investing is fundamentally about finding companies that practice corporate sustainability and directing investments, financing, and business energies to them.
Unethical practices such as forced labour, child labour, and corrupt business dealings have long been universally condemned. Increasingly, attention is also being directed towards other societal factors like environmental degradation, human rights violations, employment discrimination, unsafe working conditions, and financial transparency. These factors challenge the notion of a singular pursuit of profit maximisation by investors.
For example, few European companies and their investors would ethically condone using Russian gas, even though the shift to use alternative sources will have clear negative impacts on profits. Moreover, the heightened focus on other factors underscores a growing acknowledgment of the interdependence among profit maximisation, ethical principles, social responsibility, and sustainable investing practices.
The evolution of sustainable investing
Early Ethical Investing
Investing practices have not always been solely focused on profit maximisation. While financial returns have been a central aspect of investing, historical evidence suggests that ethical, moral, and societal impacts have also strongly influenced investment decisions. Across various periods and cultures, a range of factors have shaped investment strategies, reflecting broader social, cultural, and philosophical values.
The Roots of Social Responsibility in Western Business Culture
In ancient civilisations, investments often aligned with religious or ethical beliefs, with individuals and institutions avoiding activities considered immoral or unethical. Similarly, during the Middle Ages, religious principles guided investment decisions, with concepts such as usury and ethical lending practices playing significant roles.
Ethical Considerations in Investing
Investors who prioritise ethical considerations, in stead of profit maximisation, may actively avoid companies involved in unethical or harmful practices, such as bribery and corruption, financial crime, or sanction busting. Instead, they may seek out companies with transparent business practices, fair labour policies, and a commitment to integrity and accountability.
Promoting Positive Change
While unethical business practices have unfortunately been prevalent throughout history, ethical investing represents a conscious effort to promote positive change and encourage companies to uphold higher standards of conduct. By directing capital towards ethical and sustainable businesses, investors can contribute to the advancement of responsible business practices and the betterment of society as a whole.
Historical Milestones of Sustainable Investment
The history of sustainable investing is a journey that reflects the evolving relationship between financial markets, ethical principles, central regulations, and governance concerns, and can be summarised as follows:
- Early Ethical Investing (Forever-19th centuries)
- Moral Capitalism (19th-early 20th centuries)
- The Rise of Socially Responsible Investing (1960s & 1970s-present)
- Civil Rights Movement (1950s-1960s):
- Anti-Apartheid Movement (1960s-1990s):
- Environmental Movement (1960s-present):
- Women’s Rights Movement (1960s-present):
- Anti-Tobacco Movement (late 20th century):
- Corporate Accountability Movement (1990s-present):
- Global Justice Movement (late 20th century):
- Impact Investing (1960s-1970s-present).
- The Evolution of Corporate Governance (1990s-present)
- The Ten Principles of the UN Global Compact (2000)
- The Birth of ESG Criteria (2000s)
- UN Principles for Responsible Investment (PRI) (2006):
- Green Bonds (mid-2000s – Present)
- Sustainable Development Goals (SDGs) (2015)
In spite of efforts to consolidate the regulation of sustainable investments under government oversight, exemplified by the unsuccessful promotion of private Bill C-300 in Canada (2009), much of the sustainable investing landscape remains reliant on voluntary initiatives and private “self-regulation.” Within this more adaptable framework, companies retain the discretion to disclose information and commit to sustainable practices at their own pace, potentially allowing incumbents to exploit policies as tools for maintaining their market dominance.
Regrettably, attempts to formalise socially responsible business and sustainable investing through governmental regulation have encountered considerable resistance, further solidifying the influence of established interests. Increasingly, companies only respond to investor and stakeholder demands with disclosures and commitments, and some are even actively resisting pressure from their own shareholders.
The Role of Regulation in Balancing Social Responsibility and Economic Pursuits
A significant political backlash has emerged against the central regulation of sustainable investing and ESG initiatives. In the United States, a notable ideological battle is unfolding at the state level, with liberal-leaning state governments endorsing ESG-focused investing while conservative-led states aim to exclude it. This conflict raises fundamental questions about the government’s role in shaping ethical standards for businesses.
There are differing perspectives on the extent of government intervention. Some argue for limited government intervention, advocating greater autonomy for individuals and businesses in their decision-making, including matters related to ethics and compliance. Others advocate for a more active government role in setting ethical standards and regulations to govern business practices.
Balancing autonomy and regulation presents a delicate challenge, but certain ethical imperatives, such as actions against bribery, sanctions, and money laundering, are already clearly outlined in legal frameworks and should not be subject to individual interpretation or discretion. The question will be how business regulations evolve to increasingly integrate sustainability into operations and reporting practices.
Evolution of voluntary corporate sustainability initiatives
Corporate initiatives addressing governance have proliferated, garnering support from entities like the UN Global Compact and Transparency International. The voluntary UN Global Compact established principles for responsible business conduct across human rights, labour, environment, and anti-corruption.
Manageable concepts or watered-down commitments?
These broad principles have transformed into more specific ESG proposals, leading to a landscape cluttered with competing ratings and allegations of greenwashing. In addition, various interest groups have advocated for postponing the implementation of certain transformation strategies while pushing for the acceleration of other regulations that could be considered anti-competitive.
It is important to critically examining the motivations, consequences, and ethical considerations surrounding various economic and regulatory frameworks. Stricter ESG regulations can actually pose challenges, especially for nations and companies with fewer resources or less developed infrastructure. Therefore, it is crucial to balance the pursuit of ethical and sustainable practices with considerations for economic inclusivity and development.
We illustrate the progression from the “comply or else” model to the “apply or explain” approach, reflecting a significant shift in corporate governance. The traditional “comply or else” method involved strict adherence to regulatory standards, with non-compliance resulting in penalties or consequences. In contrast, the newer “apply or explain” paradigm emphasises transparency and accountability, and includes a shift to more involvement by shareholders.
This transition, which shifts more power to shareholders rather than their agents, underscores a more nuanced and flexible approach to governance. It promotes responsible business practices while allowing for adaptability based on unique circumstances.
Governance initiatives are shifting power to investors
Types of sustainable investing
- circular and regenerative investing
- clean and renewable energy investing
- community investing
- diversity and equality investing
- ESG Investing (Environmental, Social, Governance)
- ethical investing
- faith-based investing
- fair trade investing
- gender-lens investing
- global justice investing
- impact investing
- socially responsible investing (SRI)
- values-based investing
Navigating ESG metrics: risks and External Influences
The fundamental challenge with sustainability measurements lies in data quality and the lack of standardisation. Diverse ESG metrics complicate comparisons, raising concerns about reliability and prompting involvement from standards-setting bodies.
The concerns about manipulation of ESG ratings raise doubts about the effectiveness of voluntary corporate initiatives. The uncritical acceptance of future promises by corporates and ESG rating agencies undermines efforts for meaningful change. The challenge of interpreting ethical practices is evident. For example, while dealing in sanctioned crude oil from Russia for profit is widely condemned, should we not also condemn OPEC nations for cutting oil output to exploit conflict situations?
As discussions on ESG’s role evolve, the need for standardised and reliable metrics becomes increasingly apparent. But also, perhaps more crucially, non-standardisation entails the risk that voluntary corporate initiatives may fall short of delivering sustainable change. A critical reevaluation of the Ten Principles of the UNGC, established in 2000, and so predating the narrowly focused ESG ratings, is necessary to address these challenges.
Linking the Sustainable Development Goals (SDGs) to the Ten Principles
Sustainable Investing and Shared Responsibility at Little Square Capital
At Little Square Capital, we acknowledge the importance of upholding ethical standards and responsibly managing natural resources. Our commitment extends beyond mere compliance with regulations. We aim to collaborate with like-minded entities, prioritizing stakeholder engagement and advocating for honesty, integrity, and fair dealing.
Our principles and goals extends beyond mitigating business risks and creating economic opportunities; it’s driven by respect for and support of fundamental traditional ethical principleshonesty, integrity, and fair dealing.
This decision aligns not only with our values but responds to the growing demands of our investors, employees, followers, and other stakeholders. We believe that acting for the greater good is not just responsible but essential for the sustainable success of our businesses and the well-being of all involved.
We’re dedicate to respecting and promoting social, environmental and economic developments in the markets we serve. Our framework is integrated into our business approvals process and applied to our Corporate and Institutional clients.
Our commitment to Sustainable Investing
LSC's criteria for responsible and sustainable engagement
In alignment with our commitment to supporting responsible and sustainable practices, our strict elimination criteria for involvement span across Supportable Finance, People and Partnerships, and Conduct and Governance. Our values dictate that we engage with companies that are committed to achieving sustainable economic, social, and environmental performance. We advocate for transparent governance, fair labour practices, environmental stewardship, and ethical business dealings. By aligning our investments with these principles, we aim to contribute to a more sustainable and prosperous future for all.
There is no standardised process for integrating ESG information into investment analysis and valuation. This guide presents a framework for identifying ESG information, assessing its materiality, integrating ESG information into analysis and valuation, and presenting ESG information in research reports.
Guidance for integrating ESG information into equity analysis and research reports
This guide aims to support listed equity investors in integrating environmental, social and governance (ESG) considerations into their strategies. It is intended as a resource for those looking to review or update ESG policies and practices over time. The full version includes signatory practice examples and case studies.
ESG Integration in Listed Equity – A Technical Guide
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