Sustainable Investing Research Initiative Development Requires Capital – The Role of Investment Firms

The fact that all companies today need to be concerned about the impact they have in the world in the three dimensions of sustainable development – economic, social and environmental is established. Affirmative action cannot be handled anymore only by the non-profit organizations (NGOs) or philanthropies. They still have a key role to play, however for effective change to happen from a systemic view (as in any sector), capital is required. We live in market-based economies, in which profit and impact need to run side-by-side. 

Therefore, who owns and channels capital – the investment firms – have become a pivotal stakeholder in ensuring positive change is possible. According to the United Nations Conference on Trade and Development (UNCTAD), the financing gap to achieve the Sustainable Development Goals by 2030 (also called the Agenda 2030) is estimated to be USD3.3– 4.5 trillion per year. Despite the best efforts of NGOs, philanthropies, and governments donations for development (under the OECD Official Development Assistance Criteria), their contributions are not enough to close this gap. The positive impact institutions, as we may call them, do not have the capital to cover all needs. Governments have constrained budgets. Therefore, a market-based approach to development is also necessary, taking into account the local context and peculiarities where operations will run for positive returns, same as any company would consider in their business plans. And this capital to create a market-based approach to development is also held in investment firms. 

The financial services community has considerably grown into the concept of impact investing. Asset managers and other types of investment firms have been created to address this issue. Important concepts such as Economic, Social and Governance (ESG) and double materiality have been introduced, and a lot of regulations and frameworks are being developed to ensure the sector has an appropriate structure to operate. Nevertheless, having the perfect structure takes time, potentially beyond the time we have if we are aiming to create real change before 2030, and stop the world from raising temperature beyond 1.5C, as a common thread to sustainable development. Therefore, what should investment firms do? Change their operations completely to start targeting only impact investments? That would be ideal, but hardly real, considering financial markets operate based on expectations and risk management. Even so, every positive action counts. 

If investment companies start taking rigorous analysis of their investment options and ensure they are reliant (in terms of the positive benefits their capital can deliver), resilient (in terms of being able to pivot to create positive change or at a minimum do not harm), and are responsible (in delivering what they are meant to, especially for investments labeled as green), we will be in the right path. The capital will be unlocked to deliver both profit and sustainable development. These 3R’s can be a starting point to creating a space for investments to deliver change and minimize potential green/sustainable-washing. 

The idea that sustainable development and economic growth can occupy the same space has been proven and needs to be translated to reality now, whether you are an impact investing institution or a traditional investment firm. Both expect net positive returns on their investments.