A Novel Roadmap for Sustainable Investment

An important regulation has been implemented to encourage public companies to integrate sustainability issues into their short, medium and long term decisions. The ‘Sustainability Principles Compliance Framework’ published by the Capital Markets Board entered into force on October 2, 2020.

With this change, even if compliance with sustainable investment principles is not currently mandatory, publicly traded companies are required to disclose whether they comply with these principles and, if not, to provide information about the reasons.

The ‘Sustainability Principles Compliance Framework’ has been discussed for a long time among actors operating both in the academic world and financial markets.

There are 61 companies subject to valuation, including the Istanbul Stock Exchange Sustainability Index, on a voluntary basis. Valuations are carried out by using publicly available information by the institutions that the Istanbul Stock Exchange has contracted with, and the costs are covered by the Istanbul Stock Exchange.

Although there are no obligations or regulations, some publicly-held companies, including Halkbank, are currently taking actions to comply with the principles by preparing their sustainability or integrated reports.

The creation of the relevant regulation will raise awareness in general and lead many companies to take steps to comply with these principles, without the obligation to comply with time. At this point, we can say that the first question that comes to mind is what sustainability principles mean or how much they are taken into account for investors who aim for high returns.

On the other hand, whether sustainable investment principles conflict with the return maximization goal is another focus. To answer the first question, it is necessary to explain what sustainable investment is.

Corporate sustainability; It is the management of companies by considering environmental, social and governance factors and the risks related to these factors in their decision-making processes with the aim of creating long-term value. In other words, sustainable investment wants to emphasize the long-term effects of these factors by including the sustainability criteria in the decision process instead of myopic approaches that focus on short-term profit targets. Positive and negative effects that cannot be predicted by financial analysis and that may arise in the long term can be determined by ESG factors.

In this context, sustainable investment or responsible investment tries to maximize the expected return for the risk carried as in the traditional finance approach, but according to this approach, it will be necessary to ignore the risks and opportunities that neglect the ESG factors have significant effects on returns. So, what are the environmental, social and governance principles that companies must comply with in order to be considered a sustainable investment tool? Although these principles change over time and from institution to institution, it is possible to draw a general framework.

Environment: Climate change, Greenhouse gas emissions, Depletion of resources (including water), Waste and pollution

Social: Working conditions (including slavery and child labor), Local communities (including indigenous peoples), Occupational health and Safety, Relationships with employees and diversity

Governance: Managerial fees, Bribery and corruption, Board diversity and structure, Tax strategy

Going back to our main question, are sustainable investment criteria taken into account by investors? Ultimately, the most important factor that increases the motivation of companies to comply with sustainability principles will be investor demand. At this point, many academic and institutional studies show that the interest in sustainable investment is increasing.

In order to popularize responsible investment, the PRI formation consisting of international investors has more than 2000 signatories who commit to paying attention to sustainable investment decisions while investing more than 2000, managing a total size of more than 80 trillion dollars from more than 60 countries.

It is worth remembering that there are many funds that only invest in companies that comply with sustainable principles. It seems that the principles of sustainability will be more prominent both by investors and by publicly traded companies in the coming years due to both the legislative changes and the positive performance of such funds.



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