Sustainable Investment Strategies Research Articles

Contribution of sustainable investment to sustainable development within the framework of the SDGS: the role of the asset management industry

PurposeThis study aims to understand how scholarly research addresses sustainable investments’ contribution to sustainable development (SD) within the sustainable development goals (SDG) framework. This is achieved by focusing on how the asset management industry, through the practice of advanced sustainable investment strategies, can contribute more efficiently to SD.Design/methodology/approachFor this purpose, a systematic literature review using the content analysis method and comprised between the years 2015 and 2021 is carried out.FindingsA systematic literature review shows that the asset management industry is critical to integrating SDGs in financial markets, through their influence on investee companies or their investment products. The findings also indicate that SDGs are integrated into investment portfolios, particularly those managed according to the impact investment strategy and those that practice active ownership. However, the integration is not homogeneous.Research limitations/implicationsThis review has limitations derived from search engineering. In addition, research goals have conditioned the exclusion of articles that merely refer to the SDGs. Moreover, since SDGs were launched in 2015, not enough time has elapsed to analyze the total contribution of sustainable investment to achieving the SDGs.Practical implicationsThis study provides the basis for a multidisciplinary debate related to developing a good integration of SDGs in the asset management industry under new global challenges.Social implicationsGiven the disconnection between the expansion of sustainable investment and sustainability achievements, this research aims to deepen the understanding of how sustainable investment can contribute more efficiently to SD within the framework of SDGs.Originality/valueThis analysis advances previous academic research by providing insights into new pathways for future studies on how to approach the asset management industry's challenges to contribute to sustainable development efficiently in the current context.

Do Sustainable Investment Strategies Hedge Climate Change Risks? Evidence from Germany's Carbon Tax

It is difficult to assess the effectiveness of investment strategies that screen companies based on environmental criteria to hedge climate change risk because physical risks have not yet fully materialized and policies to combat climate change are usually widely anticipated. This paper sidesteps these limitations by analyzing the stock market response to plausibly exogenous changes in expectations about the level of a carbon tax in Germany. The risk-adjusted return on two sustainable investment approaches---screening companies based on environmental scores and on firms' carbon footprint---around the carbon tax news reveals that firms with a high environmental score did not perform any better than those with a low environmental score. In contrast, the stock price of firms with low carbon emissions increased in value relative to those with a high carbon footprint. Carbon intensity explains the cross-sectional reaction to the carbon tax news because it predicts revisions in expected profitability.

Smart cities, urban mobility and autonomous vehicles: How different cities needs different sustainable investment strategies

The Smart city is important for sustainability. Governments engaged in developing urban mobility in the smart city need to invest their limited financial resources wisely to realize sustainability goals. A key area for such sustainability investment is how to implement and invest in emerging technologies for urban mobility solutions. However, current frameworks on how to understand the impact of emerging technologies aligned with long-term sustainability strategies are understudied. This article develops a simulation-based comparison between different cities and autonomous vehicle (AV) adoption scenarios to understand which aspects of cities lead to positive AV implementation outcomes. As urban mobility and cities will become smart, the analysis represents a first attempt to explore the impact of AVs on a large scale across different cities around the world. Archetypes are formed and account for most, if not all, world cities. For three of our archetypes (car-centric giants, prosperous innovation centers, and high-density megacities), promoting AV-shuttle use would deliver the greatest advantage as measured by improvements in the model's KPIs. To develop urban powerhouses, however, micromobility would deliver greater benefits. For highly compact middleweights, a shift from private cars to other non-AV modes of transportation would be the smartest choice.

ESG/sustainable finance in securities lending

Today, more and more investment strategies are not only led by profit considerations but, also by the incorporation of environmental, social and governance factors and their effect on our planet and society. Sustainable investment strategies are not only limited to the relationship between client advisers and investors but also need to be considered in other business areas, such as lending/borrowing and securitisation/collateralisation. Achieving an effective incorporation of sustainability risks and opportunities to the regulatory framework requires collaboration between global and national policy makers, regulatory and industry bodies. This paper provides the current status regarding global developments — geographically, regulatory and industry driven — in incorporating ESG factors to the securities lending business/process, the current holistic regulatory environment and the current data requirements and challenges, together with suggested guidance for compliance personnel. As a final remark, all financial initiatives and regulations require data — key factors are generation, collection, enrichment, processing and distribution in a timely manner and of top quality — not only as part of the investor's advisory process, but also when it comes to the integration of ESG into the securities lending process.

Redefining Shareholder Value Maximization: Identifying key sustainable investment strategies and their role in rehabilitating corporate purpose

The purpose of this essay is to situate investing in a commercial context where consideration of ESG and impact factors at the least does not compromise investment returns, and hence excludes discussions on non-profits, private foundations and charitable organizations. Instead, I look into pension funds, private equities and hedge funds whose primary fiduciary duty is to serve the economic interest of beneficiaries. Grounded in case studies and real-life interviews, this essay explore ways in which investors can transcend their roles of merely financiers to become gatekeepers, value creators and reformers of corporate mission, steering companies towards the path of sustainability. Ultimately, by examining the regulatory framework, valuation models and implementation tactics of various sustainable investment strategies, this essay seeks to illuminate a new understanding of ‘value maximization’ that ties positive externalities to long-term portfolio performance.

СТАЛІ ІНВЕСТИЦІЇ: СВІТОВА ПРАКТИКА ТА ПЕРСПЕКТИВИ ДЛЯ НАЦІОНАЛЬНОЇ ЕКОНОМІКИ УКРАЇНИ

The article is devoted to investigating the basics and trends of the development of sustainable investing in the global economy and the practice in Ukraine. Sustainable investing is defined as an investment approach referring to environmental, social, and governance (ESG) factors in selecting and managing investments. A comparison of responsible and sustainable investments is made. Sustainable investing is shown to be much more extensive than the responsible one and includes not only ESG strategies of the companies but as well introducing and performing some (or all) of UN principles of sustainable development in their businesses. The following basic sustainable investment strategies are defined: Negative/exclusionary screening, Integration of ESG factors, Corporate engagement&shareholder action, Norms-based screening, Best-in-class/positive screening, Negative/exclusionary screening, and Sustainability themed/thematic investing. Current trends based on statistical data analysis are shown in implementing sustainable investment strategies. The author proves the appearance of a new paradigm of development and interrelations in national investment ecosystems through forming new factors in investment environments and definitely other interaction models, as well as the regulative principles to be introduced and policies to be developed. The sum-up of existing practices in implementing sustainable investment strategies in Ukraine is made. It is stated that the institution of corporate social responsibility, the implementation of the principles of sustainable development in the activities of economic entities at all levels, and the development and implementation of sustainable investment strategies in Ukraine are currently in their infancy. Also, suggestions about profitable products in the Ukrainian investment ecosystem in the post-war renovation are made.

Sustainable investment strategies and a theoretical approach of multi-stakeholder communities

<abstract> <p>The digital industrial revolution continues to expand the global network of economies and societies. Nevertheless, difficulties of sustainability such as climate change and disruption have become more severe. Multi-stakeholders are crucially important to resolve difficulties posed to sustainability in global communities. Sustainable communities are expected to be constructed through competitive and cooperative schemes of multi-stakeholders. Sustainable global communities must reform centralized economies with top down systems and must move toward decentralized mechanisms known as bottom-up societies. Sustainable investment strategies to support environment, society and governance (ESG) presumably improve social welfare. The main findings presented herein are summarized as explained hereinafter. First, this article describes that multi-stakeholders can introduce a decentralized incentive scheme into global economies and can provide mathematical expressions of sustainable investment strategies. Secondly, the decentralized formulation described herein is used to evaluate the improvement of ESG initiatives by the decrease of social welfare losses. The formulation states mathematically relative relations among the investment strategies. Thirdly, this mathematical model explores the social welfare effects of initiatives to enhance standards, regulations, and legislations. Empirically, one finds that integration strategies have grown remarkably as a core part of social institutional reform for sustainability. Finally, initiatives to improve social evaluation by individuals who are excluded from market transaction are demonstrated to decrease social welfare losses greatly. These findings can promote initiatives to alleviate the disruption difficulties faced by communities.</p> </abstract>

Predicting Volatility Index According to Technical Index and Economic Indicators on the Basis of Deep Learning Algorithm

The Volatility Index (VIX) is a real-time index that has been used as the first measure to quantify market expectations for volatility, which affects the financial market as a main actor of the overall economy that is sensitive to the environmental and social aspects of investors and companies. The VIX is calculated using option prices for the S&P 500 Index (SPX) and is expressed as a percentage. Taking into account that VIX only shows the implicit volatility of the S&P 500 for the next 30 days, the authors develop a model for a near-optimal state trying to avoid uncertainty and insufficient accuracy. The researchers are trying to make a contribution to the theory of socially responsible portfolio management. The developed approach allows potential investments to make decisions regarding such important topics as ethical investing, performance analysis, as well as sustainable investment strategies. The approach of this research allows to use deep probabilistic convolutional neural networks based on conditional variance as a linear function of errors with the aim of estimating and predicting the VIX. For this purpose, the use of technical indicators and economic indexes such as Chicago Board Options Exchange (CBOE) VIX and S&P 500 is considered. The results of estimating and predicting the VIX with the proposed method indicate high precision and create a certainty in modeling to achieve the goals.

The Framing of Sustainable Finance in Charitable Foundations—Findings from a Qualitative Study

In the face of decreasing returns on investments and the growing influence of sustainability requirements, foundations have had to adjust the way they invest their assets. Sustainable investments have shown themselves to be as robust in terms of their returns as conventional investments and—more than that—they can support foundations’ goals much more effectively. But only very few foundations implement sustainable investment strategies. The present study analyses the reasons for this, by means of interviews with personnel responsible for assets. The interviewees operate as ‘sense givers’ who have to kickstart a process of strategic readjustment. The reference framework for their ways of thinking and acting has been investigated using framing analysis. So-called sense givers’ isolated position in their foundations is the rather disturbing finding of this study. Familiar strategies of action seem to be of little help in their endeavours. This is frequently expressed in sometimes poignant calls for external guidelines and role models, while specific ideas about courses of action remain relatively vague. This applies particularly to large foundations where strategic readjustments are hindered by complex structures and hierarchies, whereas in small-scale entities, decisions follow shorter, face-to-face pathways. The imperative of carving out a complex sustainability discourse in their foundations drives sense givers to activities like networking inside and outside their foundations in order to exchange ideas and build alliances, for example within the German Association of Charitable Foundations. Investment managers need first of all to develop new strategies to convince the range of stakeholders in their foundations.

Do sustainable consumers prefer socially responsible investments? A study among the users of robo advisors

Do people behave consistently when it comes to sustainability? With few exceptions, most previous studies of sustainable investment behavior rely on survey responses. Numerous studies have noted, however, that peoples’ talk is often cheap when it comes to sustainable choices. We use a financially incentivized choice to study the non-investment-related sustainable behavior of the clients of three German robo advisors and relate it to their investment decisions. We find that sustainable consumption translates into a higher likelihood of choosing a portfolio following a sustainable investment strategy among the clients of a digital wealth manager that offers both conventional and sustainable investments. Sustainable consumption also translates into a particularly strong interest in the launch of sustainable investment strategies among the clients of a conventional robo advisor. The provision of sustainable investment strategies can, next to performance and costs, be a selling point for a digital wealth manager. However, our results show that self-reported sustainable consumer behavior that is not backed up by the pertinent actions is not significantly related to sustainable investment choices. Our results lend further support to the notion that studying sustainability in terms of actual choices is crucial. We provide guidance to practitioners in the financial industry on identifying investors with a potential interest in sustainable investments.

How fiduciary duty law incentivises investors to manage sustainability risks

The compatibility of Environmental, Social and Governance (ESG) risk management with the investment management requirements under the investors’ fiduciary duties (FD) figures among the key questions in today’s context of a rapid growth of sustainable investment strategies. Despite some legal developments, namely, in Europe, investors still have no clear answer to this question, which leaves them inert in the face of these new, unconventional types of risk. In our research, we explore the recent advancements in the EU and the US legal practice with the objective to establish to what extent the FD actually requires investors to consider ESG risks in their investment management decisions. Through analysis, we define a theoretical decision-making pattern for ESG risk management set by the current FD law as applied to investors and identify: 1) ESG risk materiality and 2) the effectiveness of ESG risk hedging as its fundamental elements. Then, we design a theoretical representation of ESG risk materiality under the FD legal constraints and identify that the current FD law binds investors to assimilate ESG risks to financial risks; thus, their management is required only if they are financially material for investments. We show that this principle equally applies to long-term ESG risks (like climate change); investors are incentivised to manage only those that are sufficiently financially material considering the applied hypothetical discount rate. Also, through the case study of a recent US ERISA ESOP lawsuit, we reveal that risk aversion towards probability to successfully hedge material ESG risks could impede efficient risk management by incentivising investors not to hedge a material ESG risk, i.e. to breach their FD.

Implementation and profitability of sustainable investment strategies: An errors‐in‐variables perspective

AbstractFirm‐level studies of sustainable investment performance are typically limited by an errors‐in‐variables bias (i.e., a distortion of estimated regression coefficients caused by measurement error in explanatory variables). Using recent advances in statistical methodology, we present the first cross‐sectional analysis of sustainable stock selection which adequately corrects for this bias and additionally answers the question of whether betas with respect to sustainable risk factors or sustainable characteristics (i.e., environmental, social, and governance ratings) are more relevant in portfolio selection. Within the universe of S&P 500 stocks, which is highly relevant from the investor attention and liquidity perspectives, we find that, after accounting for errors‐in‐variables bias, both types of variables become insignificant. Consequently, they do not add value to investment portfolios and are not vital in models explaining stock returns. Among classic predictors with a long history of use in the investment fund industry, only the market‐to‐book ratio provides independent investment and pricing information.

Revisiting Investability of Heritage Properties through Indexation and Portfolio Frontier Analysis

In recent years, the soaring prices of heritage properties in Georgetown, Penang have gained the attention of practitioners and investors. The practitioners claim that the prices of heritage properties within the core and buffer zones in Georgetown have increased more than 300% since the city was recognized as a UNESCO World Heritage site in 2008. Such heritage properties containing historical or art elements that lead to forming a diversified portfolio could exert a low correlation of returns with conventional assets. In addition, rehabilitation of heritage properties requires high restoration costs and conversion fees. Despite the above claims, there is an absence of empirical studies relating to heritage investability, particularly to prove whether the heritage properties are truly worth investing in. Thus, this study incorporates a self-developed heritage properties Index (PIHPI_HR) into the conventional investment portfolio for assessing diversification effects. This study has collected 853 units of transacted properties for constructing a 10-year price index (PIHPI_HR). Subsequently, its diversification effect was examined through the Efficient Frontier (EF), derived from the Modern Portfolio Theory (MPT). The findings have proven the optimization of the conventional portfolio by enabling investments in heritage properties where the return is higher than other investment assets at the same risk level. This study also unveiled the price movement of heritage properties together with their investment value, which is deemed to be useful for institutional investors and the public to formulate sustainable investment strategies in the future.

Sustainable development and financial system: IntegratingESGrisks through sustainable investment strategies in a climate change context

AbstractSustainable Investment funds are one of the most appropriate ways for the financial system to contribute to sustainable development. However, the effective contribution of Sustainable Investment funds can vary widely depending on their management strategy. This paper aims to analyze which strategies or combinations of them allow practitioners to better manage ESG risks in ESG portfolios within a complete framework consistent with global challenges that focus on sustainability and carbon risk scores. To analyze the differences between Sustainable Investment strategies, we adopt a parametric analysis of variance method. We find that, on average, funds that only apply negative filters achieve worse ESG risk scores and show worse carbon risk. In sum, this study contributes with more in‐depth knowledge about the different outcomes in terms of sustainability risks of the different SI strategies.

Assessment of sustainable development through a multi-criteria approach: Application in brazilian municipalities

In the last decades, there has been an increase in impacts on the environment, driven by the industrialization process. As a result, society's social and environmental awareness increased, and business organizations began to promote corporate social responsibility initiatives to positively contribute to better working and environmental conditions, and other sustainability issues. This article aims to verify the performance of 217 Brazilian municipalities from 31 indicators segmented in the three dimensions of sustainability (economic, environmental, and social), selected from the literature review, to contribute to the sustainable investment strategy of organizations. To this end, we used the multi-criteria decision making method, Technique for Order Preference by Similarity to Ideal Solution (TOPSIS), and proposed an analytical sustainability dashboard. The main results of this paper were the sustainable performance rankings of the municipalities and the dashboard with three analytical panels that contributed to identifying the points of improvement of each municipality, consequently contributing to the investment strategy in these locations. This research consists, therefore, of an important methodology, combining the multi-criteria method and the sustainability dashboard, to assess the sustainable development of the municipalities in the triple bottom line dimensions.

La financiación de los servicios de agua y saneamiento: dos tipos de fondos para hacer frente a los desafíos de la inversión en el Brasil

In the countries of the Global South, investments in the water and sanitation sector have historically not met the overall needs. The poor are generally the most affected. The creation of funds to support universalization of water supply and sewerage services may represent an important instrument as a sustainable investment strategy. This study displays the features and characteristics of two distinct fund models at the state level in Brazil. It indicates that despite challenges these funds offer opportunities for meeting the main objective of the water and sanitation policy in Brazil, the universalization of service provision. It suggests also that the Brazilian experience might be adapted to other contexts.

STATE REGULATION OF THE DEVELOPMENT OF CORPORATE SOCIAL RESPONSIBILITY IN THE TRANSFORMATION TYPE COUNTRIES IN EASTERN EUROPE

The purpose of this research is to investigate the processes of formation of corporate social responsibility in countries of transformation type in Eastern Europe and to study the perspectives of development of socially responsible investing based on studying the world experience in the field of corporate responsibility and the practices of its realization by economic entities in the world. The theoretical and methodological basis of the research is the dialectical method of cognition of the processes of formation of corporate social responsibility in transformation societies, using the experience of the foreign community in similar processes and the possibility of applying individual practices in domestic business. The following scientific methods were used in the research: abstract-logical, in particular, its methods of generalization, analogy, analysis and synthesis, induction and deduction for the formulation of theoretical generalizations of research results, formulation of conclusions and suggestions. Main objects of the study are: theoretical bases of formation and realization of mechanisms of state regulation of corporate social responsibility and socially responsible investing in the world and opportunities to apply their experience in the countries of Eastern Europe; determining the current level of corporate social responsibility at enterprises and organizations and assessing the prospects for their development and influence on socio-economic processes. Practical implications. The stakeholder theory is considered, which reveals the essence of corporate social responsibility in the process of satisfying interests and requirements of various counterparties that may affect the ultimate financial results of the enterprise. It is determined that the main causes of state regulation of corporate social responsibility are a moral obligation, sustainability, and reputation. Corporate social responsibility is an effective tool for enterprise development, as well as for the development of the process of state regulation and constructive dialogue with different social categories that enhances the investment attractiveness of the enterprise and strengthens its reputation, promotes effective labour relations and enhances productivity, supports the marketing policy and trust of the target audience by forming a positive opinion about products, works or services of the enterprise. Modern strategies on the basis of which companies perform the formation of their investment portfolios are considered (sustainable investment strategy, norms-based screening and exclusion of holding from investment universe, integration of ESG factors in financial analysis, impact investments, engagement and voting on sustainability matters). The issue of the undeveloped practice of submitting social reports and difficult public access to them by stakeholders is considered. A model for analysing the prospects of corporate social responsibility development at enterprises is proposed; corporate social responsibility strategy provides for the fulfilment of economic, social, and environmental goals for the successful implementation of corporate social responsibility and socially responsible investment initiatives.

Analysing Managers’ Financial Motivation for Sustainable Investment Strategies

The purpose of the research is to examine the importance of financial rewards and managers’ motivations, including sustainable investment projects. For that, the role of financial motivation for managers is analysed to understand strategic priorities for sustainable investment policies. Panel data for non-financial listed companies in China are used to determine the best-fit values of the proposed model, and the results of the Lagrange multiplier (LM) and Hausman tests are discussed for sustainable investment strategies. The results demonstrate that both low-paid and highly-paid managers in valuable project firms tend to be conservative and that managers consolidate their positions through underinvestment. This finding is clear evidence that managers are reluctant to take a risk on sustainable investment strategies. However, highly-paid managers of non-valuable project firms are generally willing to obtain high productivity through advanced technologies. The results are also generalized for strategies that are related to project managers’ financial motivation to increase the efficiency of sustainable investment decisions.

Drivers of Investor Motivations for Impact Investments: The Case of Microfinance

Recent empirical research shows that both financial and value-related considerations prevail for an individual’s decision to invest in companies or products deemed sustainable or socially responsible. This paper investigates how different investor motivations vary across forms of sustainable investment strategies, in particular between broad sustainable investments and targeted impact investments. We use a unique dataset of retail investors engaged in a development oriented microfinance investment vehicle to analyze how different motives affect the demand for distinct sustainable investments. Our results show that different motives trigger different types of sustainable investments. While decisions to engage in general sustainable investments are mainly linked to return and risk expectations, the investment decision for the impact investment vehicle is connected more strongly to value attributes. In line with previous findings on general sustainable investments, we find that the decision to invest is driven more by value-related criteria while the amount invested is driven by financial motivations. Our analysis furthermore shows that distrust in the financial markets is a major driver for the share invested in general sustainable investments, but not in impact investments.

Most finance to halt desertification also benefits multiple ecosystem services: A key to unlock investments in Land Degradation Neutrality?

Quantifying the demand for multiple ecosystem services is difficult because it is subjective and heterogeneous. Using land degradation as a case study, this paper explores land restoration finance as a proxy for global ecosystem service demand. Land degradation has been high on the UN agenda since the 1992 Rio Summit, together with climate change and biodiversity. The supply of many ecosystem services is declining due to land degradation and desertification, particularly in drylands. The inclusion of a Land Degradation Neutrality (LDN) target in the United Nations (UN) 2030 Agenda for Sustainable Development reaffirmed the commitment by the international community to tackle this global environmental challenge. If this vision adequately reflects society’s values, as expressed through demand for ecosystem services, we should see land restoration finance targeting areas where potential ecosystem service supply could be enhanced the most. To test this hypothesis, we used spatial analysis of key ecosystem services, as well as comparative analysis of synergistic values and other indicators of financial resources committed between 2008 and 2013 to address land degradation. These activities can generate multiple benefits for many ecosystem functions and services. Official activity-level environmental ratings – called Rio Markers – were used to identify those activities that were intended to produce multiple ecosystem services benefits in terms of land restoration, biodiversity protection and climate change mitigation. Our analysis concludes that many land restoration activities are synergistic and reveals other important aspects: (i) developing countries report, on average, higher synergistic values than developed countries and development finance organizations; (ii) donor countries report more conservatively than recipient countries; (iii) multi-purpose synergistic projects attract more funders than single-purpose ones. In some cases countries with high ecosystem service supply receive higher investment, but this finding is not strong, indicating that investment could be more strategically targeted. These findings suggest, in particular, that the synergistic features of multi-purpose land restoration activities could be harnessed to enhance investment effectiveness and impact. This, in turn, would make LDN finance more prominent in development aid portfolios and in public/private sustainable investment strategies.