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Sustainable Investment Management Strategy

This article was published in Kompas on June 13, 2021.

World Environment Day is commemorated every June 5th. The commemoration was carried out to raise global awareness about environmental sustainability. As an investor, this event can be used as a momentum to start implementing sustainable investment strategies.

Investors are responsible, although indirectly, for the negative impact or damage caused by the company’s business activities. This case also applies to the contrary, financing from investors can encourage the development of social and environmental based projects. Environmental, Social, and Governance (ESG) impacts need to be taken into consideration in placing funds.

This concept is called sustainable and responsible investing. Investments are made in instruments or companies that have a positive impact. At least, these companies and projects do not go against the ESG principles.

Sustainable and responsible investing actually not new. Previously, many investors, especially those with idealistic thoughts, did not invest in liquor or cigarette companies. Both businesses are seen as having a negative social impact. This concern extends to other ESG issues such as environmental sustainability, climate change, community empowerment, and even corruption.

Concern for ESG aspects is in line with financial investment considerations. The sustainable investment strategy supports the investment objective itself, in particular to obtain better profit. Companies with good governance and sustainable orientation tend to have better performance.

Research by the Morgan Stanley Institute for Sustainable Investing (2021) provides conclusions that confirm the reason. Sustainable investments generally provide better advantages than traditional methods. On the other hand, sustainable investment also has better risk protection when the market is under pressure, such as at the early phase of pandemic.

The easiest way to make sustainable investments is to make exceptions. Businesses deemed problematic, such as cigarettes, gambling, and liquor, are removed from the investment portfolio. This “black list” can be added with other business fields according to the criteria of each investor.

Sustainable investment can also be done in the opposite way, by compiling a portfolio with positive screening. This statement means that investors only invest in business fields that can be categorized as sustainable. In the Sustainable Finance Roadmap Phase II, The Financial Services Authority/Otoritas Jasa Keuangan (OJK) has assisted in compiling a list of sustainable business activities. There are twelve business activities classified as sustainable, including renewable energy, energy efficiency, environmentally friendly transportation, climate change adaptation, and micro, small and medium enterprises (MSMEs).

Another way is to invest in companies that have a strong sustainable strategies implementation regardless of the business field. The sustainability strategy of each company can be assessed from the company’s Sustainability Report. In accordance with the OJK Regulation on the Implementation of Sustainable Finance, every public company is required to publish this report annually. In addition to the sustainable strategy, this report also includes economic, financial, social and environmental performance.

Sustainable Portfolio

In terms of investment instruments, there are several products that are in accordance with the concept of sustainable investment, including green bonds, sustainable company shares, and financing for MSMEs. Green bonds can be issued by the government or corporations that meet the requirements in accordance with the OJK Regulation on Green Bonds. These conditions include, among others, that these green bonds can only be issued to finance environmentally sound business activities. Green bond issuance must also include the opinion of environmental experts in accordance with the business activities being financed.

On the stock market, the Indonesia Stock Exchange (IDX) has published at least two Indexes related to sustainable finance. The indexes contain shares of companies that are considered to have complied with the principles of sustainability. Armed with the publication of the two indexes, investors can invest directly in the shares of companies included in the list released. In addition, investors can also buy index funds that based on the two Indexes.

Investing in MSMEs have a positive impact in the social sector, such as equitable distribution of welfare and job creation. Investing in MSMEs can be done through peer-to-peer lending or crowd funding. Several peer-to-peer lending platforms provide productive financing for MSMEs. Meanwhile, through the equity crowd funding platform, investors can invest in shares or buy bonds to MSMEs.

Investors can determine their own sustainable investment strategy according to their investment targets and risk profile. This strategy can also be implemented gradually with a certain portion of the investment portfolio. By implementing sustainable investment strategies, investors can achieve personal investment goals while protecting the environment and achieving shared prosperity.

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