Policy brief

Sustainable investing: How to do it

Sustainable investment is gaining momentum in Europe, but its current proposed taxonomy might hinder innovation in the field. In this Policy Contribut

Publishing date
28 November 2018

In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. Investors have an important stewardship role to steer companies to sustainable business practices that will achieve long-term value creation.

Policy proposals from the European Union High Level Expert Group on Sustainable Finance, published in January 2018, promote a fiduciary duty to include sustainability in investment, company disclosure of sustainability information and a unified classification system (or taxonomy) of sustainable investments from which investors can choose. A fiduciary duty to include sustainability in the investment process and to disclose sustainability information can accelerate sustainable investment.

But an official taxonomy might stifle innovation in sustainable investment. While such a taxonomy might bring much needed clarity in certain markets, such as the emerging market for green bonds, the general approach to sustainable investment should be market-led. Investors and banks are best placed to assess which companies are prepared for the transition to a sustainable economy.

This Policy Contribution proposes an active investment approach to sustainable investment. This active approach is based on fundamental analysis of companies’ environmental, social and governance (ESG) factors and engagement with investee companies on material ESG factors. The aim is to uncover and realise companies’ social and environmental value alongside their financial value.

Building on previous research (De Jong et al, 2017), we present a six-point plan for sustainable investing. These points range from active investment in concentrated portfolios and long investment horizons, to deep engagement with companies and shorter investment chains.

About the authors

  • Dirk Schoenmaker

    Dirk Schoenmaker is a Non-Resident Fellow at Bruegel. He is also a Professor of Banking and Finance at Rotterdam School of Management, Erasmus University Rotterdam and a Research Fellow at the Centre for European Policy Research (CEPR). He has published in the areas of sustainable finance, central banking, financial supervision and stability and European financial integration.

    Dirk is author of ‘Governance of International Banking: The Financial Trilemma’ (Oxford University Press) and co-author of the textbooks ‘Financial Markets and Institutions: A European perspective’ (Cambridge University Press) and ‘Principles of Sustainable Finance’ (Oxford University Press). He earned his PhD in economics at the London School of Economics.

    Before joining RSM, Dirk was Dean of the Duisenberg school of finance from 2009 to 2015. From 1998 to 2008, he served at the Netherlands Ministry of Finance. In the 1990s, he served at the Bank of England. He is a regular consultant for the IMF, the OECD and the European Commission.

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