Why to invest in sustainable and responsible products?
Sustainable and responsible investment (SRI) is based on a combination of financial and extra-financial criteria in investment decision-making.
Such criteria is commonly known as ESG criteria, which meet the three pillars of sustainability: Environment, Society, and Governance. Some examples of these criteria are as follows:
- Environment: Politics, management, and environmental reporting, resource consumption, pollution (water, air, waste, wood…), products/businesses of positive impact (renewable energies)/ negative at an environmental level, etc.
- Society: Promoting the fulfillment of human rights/labor rights (training, health and safety, equality…), work in developing countries/relationship with the society, products/businesses with a positive impact/negative at a social level, creation of employment, etc.
- Governance: Responsible practices /participation in governing boards, fulfillment of principles against bribery/corruption, women on boards of management, business ethics codes, relationship with stakeholders/employees/customers/providers, etc.
With this combination of criteria, the goal is to obtain a greater knowledge of assets, more rational decision-making of investments, reduction of latent risks and, in short, to create value for the investor in the long-term. The icing on the cake is that investment under these criteria allows for the generation of positive impacts on society and the environment.
There are different strategies for sustainable and responsible investment, with different levels of development and sophistication. SRI products can be fixed to one/several of them. The most important are:
- Exclusions: This focus excludes investments related to several controversial activities (for example weaponry, tobacco, alcohol, etc.) from the contextof investment.
- Rule-based selection: Selection of investments based on the fulfillment of international rules and standards, such as those emitted by the OECD, the ILO, UN, etc.
- Best in class: This focus involves the selection or deliberation of the assets with the greatest performance, according to the ESG analysis, within a well-defined context.
- Thematic investment of sustainability: Investment in issues or assets directly related to the development of sustainability, inherently contributing to taking on social and environmental problems.
- ESG integration: Consists of the systematic and explicit inclusion of the ESG factors in financial analysis and investment decision-making, focusing on the potential impact of these details on the financial fulfillment of the company.
- Engagement and the right to vote: Consists of influencing activity and behavior of the companies in which it has invested through interactions in ESG matters and/or through the right to vote.
- Impact investment: Investments in assets aimed at generating social and environmental impact along with financial performance.
The evolution of SRI products demonstrates a clear positive trend at the institutional and retail client levels. More and more investors consider SRI as a key element when managing their assets. According to the latest study of Global Sustainable Investment Alliance, the amount invested in sustainable assets increased in 2018 by a volume of 30.7 billion dollars at a global level, 34% more than 2016. In Spain, according to recent data from Spainsif, in 2017 it exceeded 185,000 million euros. Furthermore, it is important to bear in mind that the SRI is not only growing, but it is becoming more sophisticated, as it evolves from the most basic criteria of exclusion to the best-in classor ESG integration models.
Market regulatory initiatives
This growth is encouraged by regulatory initiatives, initiatives of a voluntary nature such as the UN’s Principles of Responsible Investment, by the support of local and international forums like Euros if or Spainsif, as well as by increased awareness in society. Furthermore, clients who look for investment products are looking not only to profit, but often opting for investments with a positive social and environmental impact.
In Spain, Banco Santander, through Santander Asset Management, was a pioneer when they launched the first SRI investment fund in 1955. Since then, they work towards sustainable and responsible investment in the Spanish market in order to create value for their clients, society, and the environment through sustainability, future vision, consistency, and quality in its processes and services. Throughout this time, it has developed different investment solutions specialized in SRI that include all kinds of products, from investment funds to the institutional mandate and pension plans.
Today, ESG evaluation of assets where Santander invests is essentially based on two components:
- Aparticular analysis depending on the nature of the business carried out by companies or their actions in relation to their groups of interest.
- An evaluation analys is based on the concept of best in class, where the behavior of issuers with relation to the ESG criteriais monitored at a global level. With such analysis, the best prepared issuers are identified to take onfuture challenges and so they havecompetitive advantages in sustainable businesses, and so that they can anticipate and avoid potential risks.
This evaluation is not a static process as it is constantly changing. SRI involves a continuous improvement of structures and processes in business consultancies in order to better analyze the assets in which they invest and to make the most informed and analyzed decisions.