Sustainable finance and ESG investment are rapidly expanding globally, but how can individual investors get involved?
As individual investors, options can be “investments in individual stocks” and “investment trusts”. In the case of “investments in individual stocks”, one of the method is to invest in companies that practice advanced ESG efforts, which can be assessed based on their disclosed information. For instance, integrated reports contains both financial and non-financial information, while sustainability reports or website introduce ESG and sustainability in most cases. In addition, corporate sustainability ratings and ESG indices published by external organizations are also useful. The major sustainability ratings include FTSE4Good Index Series, Dow Jones Sustainability Index (DJSI) and Carbon Disclosure Project (CDP). All of these ratings play important roles for corporations in communicating about their ESG/sustainability initiatives and results to investors.
In Japan, ESG indexes adopted by the Government Pension Investment Fund (GPIF) are well known. In fiscal 2017, GPIF began using ESG indexes for domestic stocks, and in fiscal 2018, international environmental indexes. (Examples are shown in the table below).
The indexes above were selected from the standpoint of ESG. However, as mentioned by GPIF, ESG assessment has a short history, unlike financial analysis, therefore, no standard evaluation method has been established yet. Evaluation of ESG related performance still varies widely among rating organizations due to the following reasons: 1) ESG evaluation methods are not yet standardized and still developing. 2) There is room for improvement regarding ESG information disclosure by companies （i）. Consequently, we can say that it is better to treat the ratings or index as one element for consideration when making investment decisions, rather than evaluating companies just based on them.
Regarding investment trusts (funds), a number of ESG and SDGs themed products have been created. As ESG and SDGs themed funds differ in terms of theme, content, and performance, it is crucial to review the prospectus and select products that meet your objectives.
In the next column, we will cover “Global trends in sustainable finance (e.g. EU Taxonomy)".