Sustainable Investments and ESG Financial Framework

Abstract

Financial markets can be viewed as the heart and the bloodstream of economic activity, one of the main activities they carry out, in fact, is “pumping” liquidity where needed, not for free of course, but in change of some returns. As today, data about climate changes and environmental issues cannot be overlooked anymore, now more than ever the world of finance and investments must undertake actions and processes to move liquidity in favor of sustainable development and growth, in order to be able to satisfy both expectations of current generation and needs of future ones. For this reason, socially responsible and sustainable investments are experiencing a rapid escalation (Dorfleitner et al, 2015), growing more than non-sustainable ones, both in mediatic resonance and in asset under management. Hence, the market for Sustainable Responsible Investment is currently in a stage of rapid growth, making it difficult to estimate future developments (Flotow et al., 2001). Besides it is dated 2001, this quote did not lose its validity, since the bond between finance and sustainability has become much tighter in past few years. What’s interesting it’s that the fountain of the growth is double; not only there is an exponential growing in the demand of sustainable products from the bottom-up, guided by megatrends and awareness of public opinion about environmental decay, but also financial intermediaries are running across those megatrends that drive investors’ appetite towards such sustainable finance products, to satisfy their demand. Ethic finance is not a new concept, since has its roots in the religion (Fowler and Hope, 2007), since 1960’s, SRI Principles starts to effectively impact financial decisions, when some investors began to exclude from their choices of investments the so called “sins stocks”, such as stocks of companies have an active core business in production of weapons, alcohol, tobacco, gambling, adult entertainment, or other activities considered “immoral”. Then, the step-up, ESG Investments, in which both issuer and investor deeply understand that all the activities tied-up with financing activity needs to take car Environmental, Social and Governance aspects, as well as traditional returns’ target, typical of the asset management activity. Starting from the origin of Ethical Finance history, the true ancestor of Socially Responsible Investments, successively going in depth about where SRI originated in late sixties and now going through more sophisticated processes that impact investments decisions, this work aims to analyze the characteristics and behavior of ESG related equity and debt products: how are structured, their performance compared with other traditional investments products and how investment processes respond not only to the request of the market but also to environmental challenges for which are issued and offered. Hopefully, ESG material is not a one-time wonder.