CFA Institute is a global, not-for-profit organization that provides investment professionals with finance education. It aims to promote standards in ethics, education, and professional excellence in the global investment industry.
The Institute plays a major role in promoting the future of sustainable investing. In doing so, it weighs financial and extra-financial considerations to ensure that short-term goals do not compromise long-term goals, balancing stakeholder interests and seeking fair outcomes for all.
None of this is easy. But sustainable investing is critical to the sustainability of investing.
The Institute acknowledges many unknowns in the future of sustainable investing. Nonetheless, it advances three tenets where sustainable investing goes further than its forerunners:
Specifically, it is additive to investment theory and does not mean a rejection of foundational concepts. Sustainable investing develops deeper insights about how value will be created going forward using environmental, social, and governance (ESG) considerations. In doing so, it considers many stakeholders.
In many ways, the thought is that the investment world is moving from sustainable investing as a good idea to a reality – one that carries implications for all investment portfolios.
There is a growing recognition that some ESG factors are economically material, especially in the long term, and it is, therefore, important to integrate material ESG factors in investment decisions.
After many years of foundational efforts to standardize and enable ESG investing, the investment world is now entering a true, mainstreaming phase of adherence to ESG investing.
Furthermore, the COVID-19 pandemic has focused investors on the vulnerability and resilience of the financial system and intensified the discussions around sustainability.
Training in ESG investing has increased, but still fewer than half of respondents say their firm provides ESG training. Only 11% of respondents consider themselves proficient in the area.
It has revealed the need for systemic thinking and shown the personal consequences of the financial industry’s interconnectedness. From a purely financial perspective, the importance and materiality of social factors have become evident.
In the past, social factors had been external considerations of the investment portfolio. Sustainable investing practice relies on fundamental resources in both operations and people, with technology being a key factor in any program. To properly configure sustainable investing, specific areas of improvement are needed in organizational and human processes in the world of investment management.
For example, corporate investment ratings are widely used by investment professionals. In a survey by the Institute, 63% of investment professionals who responded said they used them as a part of their data analysis.
Furthermore, 73% respondents expect the influence of ESG ratings on firms' cost of capital to be greater in the next five years. Of those surveyed, 40% incorporate climate risk into their analysis.
Survey results showed that 78% of those surveyed believe there is a need for improved standards around ESG products to mitigate "greenwashing,” meaning a form of marketing spin. In doing so, a company publicizes green values and green marketing for the purpose of deceptively persuading the public that an organization's products, goals and policies are environmentally friendly.
A majority (71%) of participants agreed that alternative data have the potential to improve the robustness of sustainability analysis, and 43% expect sustainability to benefit from the application of artificial intelligence.
Meanwhile, 90% of investment professionals expect their firm's commitment to ESG research to increase, up from 72% just two years ago. To this end, approximately one-third of investment organizations have dedicated ESG specialists, and a third have portfolio managers who conduct ESG analysis.
Training in ESG investing has increased, but still fewer than half of respondents say their firm provides ESG training. Only 11% of respondents consider themselves proficient in the area, but an equal number are currently being trained, and more than 70% have interest in training − half of these within the next year.
Investment organizations, investment professionals, and the industry can support the pathway of sustainable investing with some key actions. The Institute suggests that the industry must make a transition toward increased adoption, effectiveness, and impact of sustainable investing.
» Lauren Rudd is managing director at Rudd International of Raymond James-Sarasota. Write to Lauren.Rudd@RuddInternational.com or call 941-706-3449. "Green Wise" appears monthly in The Daily Fray. "StreetWise" appears regularly in the Sarasota Herald-Tribune. For back columns, go to RuddInternational.com.
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