There is a shift in investment practices as more investors are acknowledging the significance of sustainability and ESG in the investment landscape. It is seen in the increasing sustainability reporting regulations and frameworks that join ESG and the financial sector together. It is present as internal policies and standards are being developed to include sustainability factors into investment decisions. Sustainable investing is eventually going to become the new norm.
To continue and strengthen this practice, sustainability must be implemented firmly into private investment portfolio management. By recognizing sustainability as a key factor in the financial performance of investments in this modern age, a firm is able to reap the benefits and achieve positive financial results while continuously contributing to strengthening sustainability across industries.
Integrating sustainability into portfolio management benefits both the investor and the portfolio company. With sustainability in mind, an investor can make sound investment decisions that lead to long-term success and security in the future. Climate change has crucial implications for businesses, affecting global supply chains, operations, employee productivity, and health and safety. Societal impacts, from working conditions to community involvement can build or harm operations and brand reputation. Through ESG integration, an investor future-proofs themselves and also acts as an influencing factor towards a company’s initiatives towards sustainability.
How can an investor integrate sustainability across their portfolio companies? Here are a few steps to get you started:
Your sustainability objectives, goals, and targets can set the standard for your portfolio companies. This can be done through materiality assessments and determining the most relevant sustainability issues your companies face. Once you have your priorities set, you can now create a list of your objectives and targets. By first understanding what you are intending to achieve in terms of sustainability, you can then establish the metrics and tools you will use to evaluate the sustainability performance of your investments.
Using the ESG criteria you have set, it is now time to assess the sustainability performance of your overall portfolio and each of your portfolio companies. Take note of their current sustainability performance and if they are on track with their short and long-term goals. Look into their future initiatives and assess the impact it can have on your firm. By reviewing annual sustainability reports or engaging with your stakeholders, you can determine any risks and opportunities brought forward by sustainability-related factors and how these may impact you.
At this stage, this is where you can also determine your plans to strengthen your investment portfolio. With your ESG criteria and metrics, this can gauge the performance of your portfolio companies and if there are areas they need to further improve on.
An investor can contribute to sustainable development by actively engaging with their portfolio companies. It is important to ensure that you and your portfolio companies are aligned with your goals and objectives for sustainability. This means engaging in dialogue and considering sustainability during decision-making processes. An investor can be an influence for sustainability by building awareness on the importance of having sustainable business practices and empowering their portfolio companies in developing or improving their sustainability strategies and initiatives. By being an active participant, an investor can guide businesses into better practices that yield positive outcomes and sustainable development across the business and those it impacts.
The road to sustainability requires monitoring and transparency. Allot time to reach out to your portfolio companies and review their progress. Using the ESG criteria you have set, check if they are hitting targets and key performance indicators. By coordinating with your portfolio companies, you can see if they are fulfilling their plans and if their sustainability outcomes are delivering positive results and boosting your financial and sustainability performance.
Gathering data from your portfolio companies can also ensure transparency between the two parties and accuracy for your own reports. By remaining engaged with your portfolio companies throughout both your sustainability journeys, you can map out your progress to better communicate your performance.
Practicing sustainability entails a need for review, adjustments, and improvements. The data you’ve gathered from your portfolio companies can help you identify areas of improvement and flesh out new strategies to strengthen your portfolio. External factors such as climate change and societal norms and perspectives can also reshape your sustainability objectives and bring up the need for more ambitious changes to secure stability in an evolving sustainability landscape.
Once you have set your initiatives to integrate sustainability into your portfolio, these tips and strategies can help you enhance your initiatives and make the sustainability journey a smoother venture:
Integrating sustainability in your portfolio can start from the decision-making process itself. In building a sustainable portfolio, some investors make use of thematic investing and focus only on sectors or industries that align with their objectives and still provide benefits sourced from changes in society and the environment. For example, an investor may build their portfolio around renewable energy, water quality, or social development.
Additionally, during the screening process, you can also reduce your exposure to certain risks by excluding sectors that do not fulfill your sustainability objectives. However, this exclusion may reduce diversification and potential results, thus requiring a stable balance between ESG criteria and other deciding factors.
In line with active ownership, you can strengthen sustainability in your portfolio companies by boosting awareness and sustainability literacy, fostering a culture of sustainability in your portfolio. This can lead to companies upskilling their teams through workshops, training programs, sustainability experts, and resources that can accelerate their sustainability progress.
Take advantage of ESG data management systems and climate technology. Emerging resources and software can ease stakeholder engagement and data gathering and management. An ESG data management system can also help you improve your sustainability reports by assisting you in data visualization and ensuring your reports are aligned with global standards.
Sustainability is an evolving landscape and your portfolio companies may be subject to different laws and regulations. By remaining updated with the latest policies, you can better monitor your portfolio and be informed and aware if they are breaching policies and remaining ethical in their business practices. Staying updated with sustainable investing practices and the community itself can also help you improve your sustainability strategy and align it with the best practices in sustainable portfolio management.
The impact of your portfolio towards your firm, the environment, and society can be amplified through embedding sustainability into day-to-day practices and long-term goals. Sustainability integration isn’t just about guaranteeing ethical business practices, but it is also about securing long-term success as sustainable investing becomes the norm. Through integrating sustainability in portfolio management, an investor is able to protect themselves from ESG-related risks and also contribute to sustainable economic growth and development. Integrating sustainability is a forward-thinking strategy investors must adopt to adapt in this evolving investment landscape.
At Keslio, we are deeply passionate about sustainability, equipping us with the expertise and extensive network needed to guide clients through their sustainability journey effectively and efficiently. Our expertise is particularly valuable for companies looking to embed sustainability practices into their businesses and investors looking to integrate ESG and impact into investment portfolios. To learn more about how Keslio can assist your organization on its sustainability journey, please don't hesitate to get in touch with us.
