Sustainable Investing. Going Beyond Environmental Targets and ESG Ratings

In the societies and business worlds of today, “green” or ethical investment has become a key benchmark. However, the lack of standardization and knowledge as well as a plethora of regulations in this area make it difficult for investors to assess the sustainability of an organization. In an interview with Supertrends, Kristina Touzenis shares some insights regarding the current situation and the challenges that sustainable investment poses.

Sustainable investing, also referred to as socially responsible or ESG investing, has become a hot topic due to the growing awareness and global prioritization of climate change as well as social and ethical issues. This specific type of investment allows stockholders to direct their money and resources towards companies that show an interest in and a solid commitment to tackling environmental, social, and corporate governance issues.

However, assessing the sustainability of companies in different industries has proven to be a challenging task. On the one hand, there is no general agreement concerning the criteria according to which companies should be evaluated. According to research conducted in 2020, there are over 20 sets of reporting provisions in the UK alone. In the EU, Canada, the US, China, and Australia, the number varies between 15 and 20. Most of these provisions were developed by governmental agencies, followed by financial market regulators, stock exchanges, industry bodies, and civil society.

Even though these efforts ultimately serve a desirable purpose that would be in the best interest of society as a whole, the current situation resembles what experts call “an alphabet soup of acronym-heavy measurement and reporting standards.” Far more disturbing is the fact that some companies use this lack of standardization to advance misleading criteria and ratings that don’t actually measure the company’s impact on society and Planet Earth. 

How can investors ensure that their investments are actually used for sustainable supposes? Supertrends spoke with Kristina Touzenis, who, after many years of working with UN agencies and governments on legislative development and advocacy, is currently helping the private sector navigate the world of sustainable development and prioritize investments based on sustainability goals.

Supertrends: What is the current situation in the private sector in terms of sustainability?

Kristina Touzenis: In the beginning, there were many big meetings, but apart from some exceptions, not much was being done. Then we saw an increasing interest in the investment sector and an external push towards fulfilling the Sustainable Development Goals. As a result, a lot of progress has been made on environmental matters; however, the social and good governance issues are lagging.

There is this idea that social aspects can’t be measured, and therefore, we can’t do anything about them. And people’s understanding of good governance seems very often to be limited to the board’s composition instead of assessing the internal processes that actually create good governance.

Supertrends: What would be helpful in this situation?

K.T.: First of all, all parties involved, from wealth managers, advisors, investors, and asset owners to the companies themselves, would benefit from more insight and guidance regarding the sustainability field and the implications of the reporting provisions. Moreover, the focus should be on identifying specific and measurable goals that might or might not always be expressed numerically. Last but not least, developing partnerships between the private and public sectors would certainly expand the knowledge base, bring in more insights, and potentially lead to higher convergence.

Supertrends: What are the main challenges when it comes to increasing the sustainability of various industries?

K.T.: All industries are in a transition phase, and all industries need to do better. Moreover, there is a lot of potential in industries that many investors don’t want to associate themselves with, such as extraction and fossil fuel. But we can’t close our eyes to the fact that they are actually there. On the other hand, there are a lot of industries where people are much more willing to invest, but where you actually have a lot of hidden issues, such as agriculture and the garment industry. Many believe that investing in these sectors is safe both from a social and from an environmental perspective. However, this is not always the case.

Broadly speaking, there are two types of companies. The first are those who acknowledge that they have to do this, but don’t know where to start. So they ask for external help, and sometimes try to get away with just a shiny report and no real effort. However, they realize quickly that regulations will soon be in place and that the external pressure is strengthening – and they finally agree to look into it.

The second group is burying their heads in the sand. They see the massive trend developing, the regulations being set into place. However, they still hope that they will not be affected. I think that the moment when you start putting a price on it, that is when people will react much more. 

Another challenge is getting people to understand that reaching sustainable goals requires in-depth knowledge. The management of investment or wealth management firms must accept that this new plethora of regulations and requirements require new know-how and competencies to be incorporated into their companies.

Supertrends: Given this situation, what can an investor do? What should an investor pay attention to if they are looking for opportunities to invest in?

K.T.: A company’s engagement and willingness to actually change is much more important than the current ESG scoring. We might even consider getting entirely away from all types of scorings, which are basically a snapshot of a company based on sometimes completely random factors. Likewise, we should try to move away from thinking that weights and scores are the best things since sliced bread. Of course, they can provide guidance and sometimes reduce the complexity of the data, but they don’t necessarily capture the complexity of the situation.

Performing due diligence is the most critical factor when assessing the sustainability of an organization. Ratings and scores are only a small component in this vast picture.

Proper due diligence will also allow for a deeper understanding of the company’s external context and internal operations and avoid investing in companies involved in greenwashing.

About Kristina Touzenis

sustainability

Lawyer by training, Kristina Touzenis worked for many years in the public sector, focusing on migration issues, international cooperation, and policy and legislation development in the Mediterranean region. For ten years, she led the international law department of the International Organization for Migration, headquartered in Geneva. She was directly involved in working with governments on legislative development and advocacy, and with UN agencies on coordination and negotiations regarding human rights, policy protection, and access to fair justice. She now focuses on helping the private sector understand sustainability-related issues and prioritize their investments according to the UN Sustainable Development Goals.

Find out more about how technology can help various industries become more sustainable in our Sustainability Publications section.

Sustainability


Catalina Sparleanu

Working with top experts to identify how the latest innovations and disruptive technologies will impact businesses, industries, and society. I have an academic background in social science (Ph.D. in Sociology), an MBA degree, and experience in private companies and NGOs.

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