Sustainable Investing is Here to Stay—Here are Two Reasons Why

Jim Madden, CFA, Tony Tursich, CFA, and Beth Williamson

Summary Points:

• Two essential factors support sustainable investing’s longevity.
• Sustainable investing disclosures are being codified around the world, helping to level the playing field and giving an edge to companies that are transparent in complying.
• Alternative data is helping investment managers discern which companies will produce long-term value.

Sustainable investing has become politicized in the US to the extent that it inhibits rational dialogue. It has struggled because some early adopters have implemented it unsophisticatedly, thinking they are saving the world; adversaries have opposed it hastily on their war against wokeism; and opportunists exploited it for their self-interest, rolling out disingenuous ESG-labeled products with higher fees. Supporters and critics have become so absorbed with endorsing and disparaging sustainable investing that they’ve lost sight of the primary goal—producing long-term value, a goal that is hard to politicize.

Whether you love or hate sustainable investing, two important factors support its longevity.

1. Sustainability disclosures are being adopted around the world.

   Around the globe, considerable standardization and legislation are being implemented concerning the disclosure of sustainable investing considerations. Regulators and a growing number of investors recognize that analyzing and quantifying sustainability indicators, as well as their effects, are material to a company’s bottom line and long-term prospects. For investors, sustainability disclosures provide a tool for understanding growth potential because companies that are fully transparent about their sustainability challenges and efforts are more likely to meet those challenges and succeed at those efforts.

   Here are several global heavyweight entities now requiring sustainability disclosures:

   • Securities and Exchange Commission (SEC)—The SEC now requires climate-related disclosures from publicly traded corporations and large private companies over a certain size. These disclosures cover climate risks, transition plans, and greenhouse gas emissions (GHG).
   • California State Regulations—California legislators have enacted mandatory greenhouse gas emissions reporting for electricity generators, industrial facilities, fuel suppliers, and electricity importers to report their GHG emissions. Furthermore, independent verification of GHG emissions data reports is required. Additionally, companies with more than $500 million in annual revenue must submit assured annual reports of their GHG emissions starting with their fiscal year 2025 emissions.
   • International Sustainability Standards Board (ISSB)—ISSB provides global sustainability disclosure standards for companies. Approximately 400 organizations from 64 jurisdictions are adopting these standards. Turkey was the first market to fully mandate ISSB in January 2024, and since March 2024, 15 other markets , including the UK, Brazil and Australia, have announced implementation timelines—with more expected to come.
   • Corporate Sustainability Reporting Directive (CSRD) in Europe—Beginning this year, large companies and listed subject matter experts must publish regular reports on their environmental and social impact activities. Companies are required to make disclosures on both financial and material impacts available. This approach helps investors, consumers, policymakers, and other stakeholders to evaluate companies’ non-financial performance. CSRD emphasizes transparency, accountability, and informed decision-making, aligning with global efforts toward a more sustainable future. Non-compliance with CSRD can lead to administrative and financial penalties for companies.

2. Savvy investment managers are using alternative data to gain a long-term performance edge.

   Alternative data doesn’t come from standard channels like financial reports or market data. Instead, it encompasses diverse sources, from government agencies to non-governmental organizations to employee feedback. This data enriches fundamental analysis by providing multidimensional insights beyond traditional metrics, fostering enhanced investment insights and unique potential investments.

   The Calamos Sustainable Equities Team believes alternative data will play a greater role in assessing asset values across public markets. It all boils down to whether a manager will use this data to get an investment edge or ignore it and misinterpret risks and opportunities.

   For 25 years, our team has used alternative data to make informed investment decisions.

   Our team is experienced in identifying and analyzing alternative data as part of our investment process. Since the late 1990s, we have used it to mitigate risk, identify opportunities and build stronger, more durable portfolios. As the amount and quality of this data improves, our job becomes easier because we can evaluate companies more efficiently and comparatively.

Sustainable Investing: hide under a rock or turn over new stones?

Sustainability disclosures that help level the playing field by providing a framework for analyzing relevant information about a company’s non-financial operations and improved alternative data, enabling enhanced risk/opportunity analysis are coming to the fore. Ultimately it is up to investors to decide whether to consider or ignore these powerful factors. We believe both traditional fundamental and alternative data are material to a company’s bottom line and long-term prospects and will continue to evaluate and integrate them into our already robust analysis.