The Importance of Ethical and Sustainable Investments

The global economic crisis originating from the financial system that emerged in the last months of 2008 first brought to the agenda the questioning of ethical values ​​regarding financial markets, market instruments, and players.

While governments used public resources obtained from citizens’ tax payments to finance private companies that were too big to fail with precautionary packages immediately after the crisis, discussions also began on the high bonuses and premiums paid to the top executives of these companies.

Similarly, mortgages and derivative products, which are considered the starting point of the global crisis, were also heavily criticized from an ethical perspective due to their excessive freedom and misuse. Ethical values ​​in financial markets are questioned after every financial crisis.

These developments have enabled the development and spread of both ethical and sustainable investments models.

What is ethical investment and why is it important?

Ethical investment means financially supporting companies that positively affect the world (or at least, do not negatively affect it). Investors who care about ethical rules are careful to achieve their goals by making investments that do not conflict with their own moral values ​​and principles.

The starting point of ethical investment is socially responsible investment, which is the religious, moral, and social values ​​of investors; It can be defined as taking into account social, environmental, and ethical thoughts and values ​​in making investment decisions, continuing the investment and terminating the investment, and using rights such as voting rights related to investments responsibly.

In other words, socially responsible investment or ethical investment is a set of approaches that include social and ethical goals or limitations in addition to traditional financial criteria when making decisions about making a certain investment, continuing this investment, or abandoning the investment.

Socially responsible investment takes into account the non-financial characteristics of company performance and company policies. In support of this idea, when viewed from the perspective of the corporate governance approach, which is one of the popular approaches of recent times, the evaluation of environmental, social, and economic factors and encouraging investors to manage their funds in a manner consistent with their own mission and values ​​should be seen as an important step.

What are sustainable investment strategies?

Sustainable investment strategies are becoming increasingly popular among investors who want to generate financial returns while also creating positive social and environmental impacts.

The first step in creating a sustainable investment strategy is definitely to define your sustainability goals. What are the issues that are important to you?

For example, do you want to invest in companies that promote renewable energy, social equality, or sustainable agriculture? Defining your sustainability goals will help you determine which areas you want to support and which businesses meet your ESG criteria.

In order to understand the concept of sustainable investment, it is necessary to have knowledge about sustainability first and foremost. The sustainability movement, which sets out with the philosophy of a better world for everyone, aims to find a balance between economic, social, and environmental factors.

In this way, it is aimed to transfer resources to future generations rather than fast, uncontrolled, and destructive production and consumption chains. In other words, sustainability includes protecting natural resources, reducing waste and pollution, supporting inclusive and egalitarian societies, and encouraging responsible consumption and production models.

Sustainable investment enables investors to contribute to sustainable businesses and projects that align with their own values. This approach aims to achieve positive social and environmental outcomes that benefit society and the planet.

By investing in projects that comply with sustainability principles, investors can both achieve financial returns and have positive impacts on the environment and society. This leads people to a more conscious and ethical consumption style.

What are ESG criteria and how to evaluate them?

Sustainable investment, on the other hand, is an investment strategy that takes into account not only financial returns but also environmental, social, and governance (ESG) criteria. ESG criteria examine factors related to environmental impact, social responsibility, and corporate governance when evaluating the sustainability and positive impact of an investment. 

Sustainable investment takes into account the long-term consequences of investing. It means investing in businesses and projects that do not contain risks such as environmental damage, social inequality, and unethical practices.

In this investment approach, individuals and institutions want to both create a positive impact on the world and achieve their financial goals by making sustainable investments.

Investing in companies with strong ESG policies can help reduce risks related to environmental disasters, regulatory changes, reputational damage, and social issues. By considering ESG factors, investors can gain a more comprehensive view of the risks and opportunities associated with their investments.

What are green bonds and sustainable funds?

The main feature of green bonds is that bond proceeds are used in green projects. For this purpose, detailed information is provided to investors about the projects in which bond proceeds will be used. In addition, the proceeds are transferred to a special account.

Compared to standard bonds, green bonds have the same features and advantages. They do not impose an additional burden on the investor. 

Green bonds:

Since flat pricing is applied, they do not create additional costs for the investor

Same recourse to issuer There is a right of recourse to the issuer

Pari passu, i.e., the same features and payment criteria as other bonds issued by the same issuer

Their green features and environmental contribution are bonus value.

In fact, green bonds constitute only a part of the bond market related to climate change. While the total value of bonds whose proceeds are transferred to climate change projects is 502.6 billion dollars as of June 2014, green bonds are 35.8 billion dollars.

What are social responsibility investments?

However, in recent years, independent of financial crises, there have been developments in financial markets that are compatible with ethical values ​​and social responsibility principles. 

Socially responsible investment is the reflection of ethical values ​​in financial markets. Socially responsible investment is a very new issue that needs to be emphasized. 

Responsible investment is an investment strategy in which investors and companies consider not only financial returns but also ESG (Environmental, Social, Governance) factors when making investments.

ESG (environmental, social, governance), defined as environmental, social, and governance, encompasses the idea of ​​ensuring that the investment made also coincides with natural and social values.

See you in the next post,

Anil UZUN