Politics and economies have recognized that our society must be ecologically restructured. At the climate conference in Paris at the end of 2015, a new agreement was adopted for the period after 2020, which for the first time obliges all countries to reduce greenhouse gas emissions. This largely removes the previous distinction between industrialized and developing countries.
The Paris Convention is a legally binding instrument under the United Nations Framework Convention on Climate Change (UNFCCC). It contains elements for the successive reduction of global greenhouse gas emissions and is based for the first time on common principles to all countries.
What role can and should the financial sector play in supporting environmental sustainability? In our view, and in view of the global environmental challenges, it is not only possible or sensible, but even necessary, to set the right incentives in the financial sector as well. However, it is not primarily static regulatory requirements that should guide investor behavior, but rather "risk-return" considerations combined with understandable business models.
Now, "sustainability" is increasingly a frequently heard term, especially in connection with the environment, which has also affected banks and asset managers. Product suppliers often refer to the now trendy label ESG, "Environmental, Social and Governance".
However, we believe it is critical for investors to understand the difference between ESG and impact investing. ESG has nothing to do with sustainable investing. ESG merely assesses the behavior of companies. For example: are they good to their suppliers, etc. Environmental awareness is only one of three criteria. However, ESG does not refer to the business model of a company. Therefore, even oil companies may receive a good ESG rating.
Impact investing, on the other hand, is about finding companies whose products have a direct impact on sustainable goals, whose technologies have a direct positive impact on society or the environment (e.g. renewable energy, recycling, education, medical care, etc.). Asset managers and investors therefore face the challenge of identifying companies whose business model is based on sustainability. Around 5000 liquid shares are listed on various stock exchanges worldwide. Thereof only about 250 - 300 are likely to meet the criteria for impact investing. However, there are many other ways to invest in sustainable projects, for example in the form of private debt.
Invest money and do good: If we take the Paris Climate Agreement seriously, we need everyone to work together. Through impact investments, investors have the opportunity to address some of the biggest challenges of our time - from climate change to water scarcity, from lack of access to healthcare to education. And all this without compromising on returns. As with a traditional investment, investors invest to increase their wealth. But only in companies that shape the world positively and according to their ideas and values.
At RML Advisory we work exclusively with carefully selected investment companies whose products have a direct impact on sustainable objectives and whose technologies have an immediate positive impact on the environment. It is essential for us to understand the business model in detail, to identify and assess opportunities and risks and to personally know the people involved.