Responsible investment refers to investment strategies that integrate environmental, social and governance (ESG) factors into decision making, aiming to generate sustainable returns while creating positive impact. Over the past decades, the market size of responsible investment has experienced rapid growth, driven by heightened sustainability awareness and various policy incentives globally. However, significant funding gaps still exist regarding the UN Sustainable Development Goals. To channel more capital towards sustainable projects, further efforts are needed to improve existing investing approaches’ contribution and engage traditional investors.
The concept and principles of responsible investment
Responsible investment aims to advance sustainable development goals while creating measurable economic, social and environmental value. Its concepts stem from the notion of sustainable development established since 1980s, covering pillars like environmental protection, social inclusion and economic growth. Common responsible investing practices include ESG integration, impact investing, shareholder advocacy, community investing, positive/negative screening based on E, S or G factors etc. These approaches differ regarding their emphasis on financial returns versus sustainability impact. Responsible investment provides an overarching direction to guide capital allocation for positive externalities.
The development and growth of responsible investment market
The market size of responsible investing has achieved robust growth globally. According to statistics from Global Sustainable Investment Alliance, by the end of 2018, total assets under management using sustainable investing strategies exceeded $30 trillion, after adjustment for overlaps from blended strategies. Among various strategies, negative screening, ESG integration and corporate engagement/shareholder action remained dominant over the years. From 2012-2018, the compound annual growth rate of sustainable investing reached 12%.
Significant funding gaps exist regarding sustainable development goals
Despite the growth, current investment size still falls short of filling the funding needs for UN Sustainable Development Goals. Estimates suggest the total annual funding gap is around $3 trillion. For goals to be met by 2030, either the market size needs to grow over 20% annually, or existing approaches must substantially improve their SDG contribution. Enhanced evaluation tools and active investor stewardship hold potential to increase investments’ impact factor.
In summary, responsible investment has experienced robust growth driven by heightened sustainability awareness, aiming to channel more capital towards sustainable development through various ethical investing practices. However significant gaps remain regarding SDG financing needs. Further efforts are imperative to engage mainstream capital and improve existing approaches’ SDG impact.