The concept of sustainable investing has been around a while but, for many, it has taken a long time for the penny to drop – that we can actually use our money, our investment decisions, to bring positive change in the world.
The good news is that momentum has been slowly gathering over the last couple of years and indeed 2020 may well just be the year that sustainable investing turned the corner.
But what are we talking about?
Sustainable investing is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.
Various other terms are often used such as responsible investing or ethical investing – while there are nuanced differences, it’s fair to say that the commonality is to achieve positive change, invariably with a social or environmental dimension.
Let’s jump straight to the elephant in the room – the controversial debate on whether being a sustainable investor results in lower financial returns.
Many people still ask whether ‘doing good’ means ‘making less’. It’s a good question.
One of the challenges we faced was the lack of data to demonstrate the contrary. However, this has changed – now we have growing evidence on how sustainable funds outperform the wider market, countering claims that ESG investment comes at the expense of performance.
As the evidence has grown so too has momentum – with more institutional investors claiming sustainable investing is the future, and fund companies launching sustainable funds at record pace. Perhaps a pivotal moment happened in early 2020, when Larry Fink in his annual letter famously stated that Blackrock would put sustainability at the centre of its investment strategy.
Most big investors now believe sustainable investing is good risk management, leveraging the practice to help manage risk in uncertain times. 2020 has been somewhat of a game changer in this regard. As the pandemic swept the world, many sustainable investors held their breath, collectively fearful of what it would mean for its impressive trajectory. But the worse did not happen – in fact, it turns out that companies that manage sustainable risks better, manage other risks better as well.
There is a great deal happening on the global policy agenda too which is shaping the way many investors are thinking.
The Paris Agreement on climate change gave us a global carbon budget, and we are seeing widespread commitments being made by corporates and investors alike to achieving the Sustainable Development Goals. All this bodes well – and let’s face it, now we have the US back at the table, things are certainly looking up.
What will happen next? Thankfully it seems that the pandemic has strengthened investors’ commitment, with demand for sustainable and green products set to grow. Certain themes within the ESG universe will gain more attention.
Climate change will remain a top priority for many investors. With COP26 scheduled for the end of the year, the summit is expected to see new and improved climate commitments, with companies and investors following suit. Diversity has been gaining attention for a few years, but the Black Lives Matter movement has brought into sharper focus the lack of meaningful progress. And of course, the pandemic also shone a spotlight on social issues, pushing many investors to reconsider management of social risks within their portfolios.
There are still challenges to overcome to embed sustainable investing as the ‘new norm’. Disclosure and ESG data remain thorny issues, with concern that data is still fragmented, disclosure is inconsistent, and the lack of standardization holds investors back. We still have some way to go on the regulatory front too – while the European Union has been a front runner with its sustainable finance agenda, there are some delays as well as ongoing debates
Despite these challenges, we have many reasons for optimism. Perhaps one of the most exciting trends is how retail investors are waking up to the sustainable investing trend. Interestingly, research tells us that a lot of this drive is coming from women as well as younger generations. New audiences and new conversations are to be had.