ESG Investing  

Sustainability should be reflected in product and strategy development

Rhodri Preece

Rhodri Preece

Company activities

This is particularly important in the context of building wealth for the long term.

For example, a company’s activities – the products or services it provides, the capital and labour used in its supply chain, its energy consumption and carbon emissions – both affect and are affected by its stakeholders and the environment it operates in.

Societal norms, stakeholder expectations and customer preferences all influence a company’s activities.

Environmental impacts from a firm’s operations, or external impacts from the environment on a firm, create risks and opportunities for value creation that manifest over different time horizons. In short, there are spill-overs across different parts of the ecosystem and over time.

A holistic approach to sustainability recognises these spill-overs and seeks to integrate them in investment analysis. This type of thinking is additive and complementary to traditional investment theory. It does not require a rejection of foundational concepts. 

Incorporating sustainability requires senior leadership vision and ownership, and firm-wide commitments supported by a collaborative organisational culture.

Investment leaders looking to advance the sustainability transition would do well to focus on ESG education, structure teams with access to sustainability expertise, ensure they apply systems-level thinking to the mindset of investing, and invest in IT architecture to efficiently incorporate sustainability data and analytics into the investment process.

The investment industry is evolving toward a more purposeful form of capitalism, in which sustainability considerations are embedded throughout the investment process.

By embracing systems thinking, the investment profession can orient itself to ensure both long-term and sustainable wealth for clients.

Rhodri Preece, is senior head, industry research, at the CFA Institute