Can Sustainable Investing Save the World?
Julian Kölbel, Florian Heeb, Falko Paetzold, and Timo Busch investigate how sustainable investing contributes to societal goals in their article "Can Sustainable Investing Save the World? Reviewing the Mechanisms of Investor Impact".
They conduct a literature review on investor impact to study three impact mechanisms: shareholder engagement, capital allocation, and indirect impacts. They conclude:
- Engaging with shareholders is a reliable way for impact investors to pursue their goals across their portfolios.
- Capital allocation can either accelerate company growth or incentivise companies to implement ESG practices, but gaps remain in the academic evidence.
- Companies that face adverse external financing conditions or are screened out for lack of ESG practices are most likely to be affected by capital allocation.
- Companies can be screened based on their adoption of cost-effective ESG practices.
- There are still some doubts regarding the effectiveness of indirect impacts.
- Developing investor impact metrics that align with societal goals is necessary to reflect the contribution of sustainable investment to companies' transitions.
- While sustainable investing can help diffuse good business practices, policy measures are necessary to drive significant change.
Sustainable investing can contribute to societal goals, primarily through shareholder engagement and, to a lesser extent, capital allocation.
Sustainable investing can help achieve societal goals like the UN's SDGs, but policy efforts are required to achieve a deeper transformation.