Investing in sustainability: 3 reasons why it’s a good idea

28 April 2023 - 10:24

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In 2023, the interest in investing in sustainability is growing. What does it mean to follow a sustainable logic for your investments and why does it make sense now more than ever?

Investing in sustainability: 3 reasons why it's a good idea

The subject of sustainability has acquired more and more importance over the years in the gigantic and increasingly articulated macro-world of financial investments.

Investing in a sustainable way represents an investment method that takes into account the social impacts, environmental and governance of one’s investment choices. Put more simply, investments made in a sustainable way are oriented towards activities and companies that respect the principles of equity, transparency and environmental sustainability.

One way to categorize investments with respect to the presence or absence of these principles is the integration of ESG criteria in the valuation of financial securities. ESG is an acronym that stands for Environment, Social and Governance and is based on a set of factors that investors can use to evaluate the performance of a company in terms of sustainability and social responsibility. In recent years, ESG assessment has become increasingly important for institutional investors and pension funds, who seek to integrate ESG factors into their investment strategies, in order to protect their investments and contribute to the achievement of the objectives of sustainable development.

Applying a financial logic, it is natural to think that companies that comply with ESG principles will also benefit from a greater inflow of capital compared to those that completely ignore them. For this reason, the concept of ESG has attracted more and more interest among investors, including retail investors, to the point of becoming a real discriminating in investment choice.

There are therefore a number of reasons why an investor might find it convenient to seek an ESG approach in their investments.

3 reasons to invest sustainably

The recent geopolitical events have turned on an alarm bell in the heads of many experts, giving rise to a new need for the countries of the globe: to reduce energy dependence on others.

1) Focus on clean energy

The energy crisis of 2022 made many governments understand the importance of the sources of [renewable energy and it is this is a first reason why investing sustainably could be a wise choice in the long term.

Over time, the world is likely to see a significant increase in interest in clean energy sources, which is good news for ESG investors. It is no coincidence that more and more governments and regulatory authorities are constantly introducing new measures to promote the environmental sustainability and social responsibility of economic activities in order to reduce polluting and socially unethical activities. In summary, it will be governments and official authorities that will incentivize investors to direct their investments towards sustainable realities.

2) Yield

And this is where the second reason comes into play: the yield. It is a common opinion that the increase in interest from strong hands in investing directly in assets that comply with ESG criteria could give a strong boost to the stock prices of companies in question.

In recent years, there has been a sharp increase in volume in funds or assets that meet the ESG criteria to the letter. In fact, numerous studies show that this type of investment could offer better returns in the long term. This is also due to the fact that sustainable businesses tend to be less exposed to environmental and social risks, with lower operating costs and even reputational risks more manageable.

In summary, according to some experts, directing investments towards activities that maintain a sustainable entrepreneurial structure could make it possible to direct one’s financial choices towards assets with a better risk-return ratio.

3) Contributing to improvement

Last but not least, investing following the logic of sustainability means contributing directly to the process of improvement of the environmental and social impact. Even if in the financial markets an investment is mainly evaluated on the basis of the return, it should not be forgotten that when one invests in a company, one’s capital will contribute to the development of the business of the same.

Indeed, sustainable investments aim to finance activities that have a positive impact on the environment and society. This means that investors will thus be able to contribute directly to improving the impact of human activities on the planet by improving the life of the community that populates it.

It should be emphasized that at last year’s COP 27 (United Nations Climate Conference) scientists repeatedly highlighted the fact that there is no more time to waste and tackling the climate crisis requires a collective action bold and swift.

It is a clear and direct invitation to the entire financial community to participate in the transition process. Unfortunately, developed countries have not yet reached the annual levels of investment necessary to fight for the fight against climate change defined in 2009 and this worries analysts a bit, but the path seems to have been well defined and an aware investor should probably also take these references into consideration while choosing how to compose his own investment portfolio.

Original article published on Italy 2023-04-28 07:17:00. Original title: Investire nella sostenibilità: 3 motivi per cui è una buona idea

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