A sustainability risk refers to an environmental, social, or governance condition or event that, if it occurs, could result in actual or a potential material adverse impact on the value of the investment. Measuring and reporting on your efforts and being more transparent about your sustainable business operations are likely to help in accessing impact funding.
But climate change still remains a major risk for businesses across the world in addition to the many risks already on the table. Can impact investing and sustainability disclosures help you reach your environmental targets and help minimise organisational risk? Let’s dive into this further below.
What is impact investing?
Put simply, impact investing is an investment plan that aims to create specific beneficial environmental or social effects and financial gains. It could take the form of several asset classes and result in a range of specific outcomes. The ultimate goal behind this strategy is to use investment capital and money for positive social results.
Investors who follow this strategy consider an organisation’s commitment to responsible corporate governance and social responsibility, as well as the duty to serve society positively. Environmental, social, and governance (ESG) and socially responsible (SRI) are two approaches to impact investing. The Global Impact Investing Network reported that 88 percent of impact investors had had their investments either met or exceeded.
What are sustainability disclosures?
Sustainability disclosures are essentially systems that allow you to measure the sustainability and/or social efforts of your business. A common example of a sustainability disclosure very prevalent in the business world today is Environmental, Social, and Governance (ESG).
These frameworks enable businesses to embed these values into how they run and operate their business. They are particularly important when it comes to appealing to impact investors who are keen to back projects that strive for societal good. The aim behind these disclosures is to share what you are doing to help protect the planet.
Can impact investing & sustainability disclosures minimise organisational risk?
In the current climate, businesses are facing many climate-related risks and various other sustainability risks. ESG initiatives continue to become a priority worldwide, and the stakeholders of many different enterprises are calling for socially responsible and sustainable finance.
In saying that, not all organisations are able to meet the expectations of stakeholders while also earning a profit. Due to this, some organisations may be tempted to avail of green finance and investments without conducting any proper due diligence. This can lead to companies investing in businesses that are misrepresenting their environmental impact or are not financially viable.
It can be very tempting to go forward with a sustainable investment opportunity without entirely assessing the risks. Luckily, there are due diligence protocols for ESG investments which help to expose any information that may leave an investor vulnerable to reputational and financial risks in the future.
There is a lot of pressure from stakeholders, consumers, and regulators to push investment toward sustainability. However, companies should not rush into investments before carrying out their due diligence. To ensure business funds are achieving the most they can for social and environmental responsibility, businesses must be fully aware of potential risks in impact investing. Risk is a necessary factor in most kinds of investing; however, with impact investments, the main risks surround whether the desired environmental or social impact is achieved.