How responsible investing combines financial benefit and impact

Over the past two decades, the concept of responsible investing has gained currency among asset managers and the investor community across the globe.

Responsible investing is an investment strategy that considers the environmental, social, and governance (ESG) implications of an investment beyond the financial return; it is both a risk metric that needs to be assessed and mitigated, and an opportunity for value addition.

The approach seeks to deliver long-term value to the investor while making a positive impact on the environment and society at large. Integrating ESG factors in investment decision-making involves assessing relevant risks, which may have medium to long-term negative impacts and may threaten the going concern of a business.

By assessing ESG standings, investors avoid risks related to improper governance practices, environmental damage, and negative brand image, which can severely impact a company’s brand and financial stability. These risks often go undetected in the traditional investment approach.

A common misconception about responsible investing is that it sacrifices financial performance for impact. On the contrary, the responsible investment approach supports sound financial principles and pursues long-term financial performance.

Numerous studies, including research conducted by Axioma, a leading portfolio analytics and risk-management solutions provider, have shown that companies with good ESG standings often outperform their benchmarks and competitors.

Companies that embrace ESG are better positioned to deliver sustainable financial performance as they are more innovative, minimize their costs, effectively manage risks, and benefit from growing customer loyalty within their industries. Such companies are also perceived to have lower regulatory risk as they are often ahead of regulations.

An important element of responsible investing, especially in our part of the world where the topic of sustainability is relatively new, is the recognition of sustainability as a journey.

As investors increasingly express their concerns about the impact of their investments, companies begin to improve their practices to become more attractive to investors and align with global trends. As the discussion deepens, more investment opportunities that specifically address ESG challenges such as climate change and poor healthcare will be introduced, and businesses will begin to build their models around sustainability.

The future of responsible investing in Ghana and on the continent is promising. There are numerous opportunities for impact through the efficient use of our resources, embracing technological advancements, and building robust regulatory frameworks to drive sustainable economic growth and societal development.

However, there is a crucial need to address challenges such as the quality and availability of data, market maturity, and stability, and lack of infrastructure to fully tap into the opportunities.

To begin with, individual and institutional investors can start their responsible investing journeys by assessing the ESG standings of their current and prospective investments, driving discussions with investee companies, and holding them accountable for positive change.

Secondly, investors can choose to align their portfolios with their values or specific ESG concerns. For instance, investors who are particularly concerned about environmental damage may choose to invest in companies that use renewable energy, efficiently manage their water usage, or practice responsible waste management.

On the other hand, investors who are particularly interested in poverty alleviation, societal development, or equality may choose to invest in companies or opportunities that support affordable housing, better healthcare, or practice inclusivity within their organization.

Similarly, investors who value integrity, fairness, transparency, and accountability in governance can invest in companies that uphold those values or drive potential investee companies to improve their governance practices.

Responsible investing is transforming the investment landscape from a purely financial focus to a more holistic view of risk, value, and impact. By encouraging positive ESG practices in business, investors will benefit from long-term financial performance and make a positive difference in the world they live in.

While challenges exist, particularly in emerging markets like Ghana, the future of responsible investing is bright with many opportunities for growth. Following the path of sustainability discussions around the world, responsible investing has come to stay, and individual and institutional investors, fund managers, and regulators need to join forces and chart this path together.