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What is sustainable investing and what are the ESG criteria that drive it?

Although the concept of sustainable investing has been around longer than you might think, it's an area that has gained in visibility in recent times. So much so that nowadays it is vital for any company to generate investment opportunities with a positive impact. Sustainable investing is guided by ESG criteria.

In December 2020, there were over 4,000 sustainable mutual funds, after a significant surge due to the COVID-19 pandemic. However, sustainable investing dates back more than 50 years to the 1970s, when the first sustainable  funds were established in response to growing demand for responsible corporate behaviour. A decade later, the Exxon Valdez oil spill prompted the creation of the Coalition for Environmentally Responsible Economies (CERES), to bring sustainability to institutions. Since then, there has been a steady flow of international agreements. The Kyoto Protocol to reduce carbon dioxide emissions was signed in 1990. The United Nations Global Compact was established in 2000 to incorporate environmental, social and corporate governance issues into the business world; and in 2015, 193 countries adopted the 17 Sustainable Development Goals, an action plan to achieve a better and more sustainable future for all.

But, what does sustainable investing consist of?

Sustainable investing is about making investment decisions based on environmental, social and governance (ESG) factors:

  • Environmental: How companies address climate change and the impact of their activities on the planet.
  • Social: How a company performs in its community, in terms of working conditions, worker relations and human rights.
  • Governance: A company's leadership on issues such as executive compensation, diversity, political influence and taxation.

There are other terms for referring to ESG investing and its various approaches. One is Socially Responsible Investing (SRI), which is defined as an investment style that integrates ESG factors into the process of researching and picking securities for an investment portfolio in order to achieve better long-term returns for investors and benefit society by influencing companies' behaviour.

Is sustainable investing compatible with good returns?

ESG investing does not mean lower returns. This investment approach offers the opportunity to have a positive impact on society while earning risk-adjusted returns over the long term. As the world's economies try to overcome the economic impact of COVID-19, sustainable investing is positioned as an essential part of the path to recovery, because of its core principles and its growing benefits.

Santander Asset Management shares that DNA and is fully committed to sustainability. We were the first asset management firm in Spain to integrate ESG factors into our research, investment platform and product range. From there, we have gained in experience and expertise to develop our own ESG ratings system, which is applied across our global business.