Sustainable investment and related terminology
While traditional forms of investing are focused purely on the creation of wealth and financial returns for investors, sustainable investment is a trend for a new type of investor.
The smart investor recognizes that to realise long-term value, a company’s Environmental(E), Social(S) and Governance(G) related activities are just as significant drivers of value, as its financial performance.
According to KPMG International, sustainable investing or impact investing is “a financial undertaking that aims to generate specific and measurable beneficial social or environmental effects in addition to financial gain”.
However, depending on who you ask, there might be minor differences in the interpretation of the term. For example, impact investing may be associated more with private funds, while socially-responsible or ESG investing tends to involve publicly traded assets. What is indisputable is that any form of sustainable investing involves the process of integrating ESG factors into the investment process and portfolio.
The rising understanding and relevance of sustainable investing has led to an exponential growth in companies creating sustainability reports and transparently disclosing their non-financial performance. Further, there is mounting evidence to show that some investors have derived larger returns with smart, and socially and environmentally conscious investment decisions when compared to traditional investment methods.
For smart sustainable investment decisions, you would need to begin with having an understanding of some of the types of investment vehicles in the market and associated jargon.
So, we came up with a list of some common sustainable investing terms, their definitions and examples to help you understand the world of sustainable investing better.
A beneficiary is the targeted recipient of a service/product who will benefit from the intended impact and will show measurable results that can be verified and form the basis of the outcome payment.
Example — A beneficiary may be anyone from society who participates in an organisation’s CSR activities. These may be programmes to uplift a specific demographic such as the rural population, senior citizens, underprivileged children and women. The activities will differ among organisations and may range from ensuring clean drinking water to educating or protecting tribal communities.
2. Blended finance
Blended finance is the strategic use of development finance to mobilise additional finance towards sustainable development in developing countries.
Example — Blended finance is used to help India’s existing healthcare ecosystem cope with challenges it faces such as limited access to capital, fewer incentives to adopt innovative practices, and lack of market intelligence and network.
IPE Global’s project “Partnerships for Affordable Healthcare Access and Longevity (PAHAL)”, and in partnership with USAID, NITI Aayog, IIT, National Health Authority, The Rockefeller Foundation, Axis Bank, etc., SAMRIDH Healthcare Blended Finance Facility aims to help catalyse innovative financing mechanisms by using commercial capital with public and philanthropic funds to mitigate barriers to private investment in healthcare. The initiative has helped raise USD 250 million by January 2022 and acts as a great case study of blended finance with the goal of helping healthcare facilities augment their capacity for production and supply of high-impact health solutions for COVID-19.
3. Carbon footprint
Carbon footprint is a measure of the total greenhouse gas emissions, expressed in tones of carbon dioxide. It is a way to assess the potential impact of climate change on a portfolio. It will measure at least one of the following:
· Scope 1 emissions: Direct emissions from owned or controlled sources
· Scope 2 emissions: Indirect emissions from the generation of purchased energy
· Scope 3 emissions: All indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.
Example — Starbucks achieved their target of going strawless across the US and Canada by 2020 by designing, developing and manufacturing a strawless lid to use across all their beverages. At the time, Starbucks had 29,324 outlets worldwide, thereby making a massive impact on the organisation’s carbon footprint.
4. Development Impact Bonds (DIB)
DIBs are results-based contracts in which private investors provide pre-financing for social programs and public sector agencies pay back investors their principal plus a return only if these programs succeed in delivering social outcomes. DIBs involve donor agencies either as full or joint funders of outcomes.
Example — Quality Education India DIB, funded by UBS Optimus Foundation, is an ideal example of DIBs being effective pushes for reform. It was set up in 2018 to support education providers in India to improve learning outcomes for 2,00,000 primary school children aged 5–11 across Delhi, Gujarat, Maharashtra and Uttar Pradesh. This particular DIB saw children participating in the initiative’s learning twice as fast as those who were not involved. In addition, during COVID-19, the initiative was able to switch to smaller groups of children with door-to-door outreach. The flexibility and results-focus of DIBs have the dual advantage of being better for governments, who find it easier to justify their investments by being able to show the results achieved.
5. Sustainable Development Goals (SDGs)
Another popular term is the United Nations adopted ‘Sustainable Development Goals (SDGs)’, which specifically call for the end to poverty, protection of the planet and peace and prosperity for all people by 2030. There are 17 integrated SDGs which recognize that an action in one area will affect outcomes in others, thereby necessitating a balance in social, economic and environmental actions for development to take root globally.
Other financial vehicles may include Green Bonds, Mission Related Investments and Science-based Targets.
The terms above are merely a small part of the financial umbrella that comprises ‘sustainable investment’. As an investor, you must make your decision only after researching and analyzing the pros and cons of your investment vehicle.
The uptick seen in sustainable investing, especially over the last few years, has acted as a catalyst and corporations, across the world, are investing time and resources to disclose their non-financial performance in their sustainability reports or as a part of their annual integrated reports.
If your organization would like to have an award-winning annual or sustainability report, get in touch with us at Report Yak. We will conceptualize, create content for and design your next report, giving your brand the recognition it deserves.