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2019: the year of sustainable investing?

18 December 2018

Olivia Woodhead, Sustainable MPS Investment Assistant

 

Every investment has an 'impact'. Until recently, some of us have been guilty of ignoring the repercussions of where we have chosen to invest our money and been predominantly focused on one thing: financial return. But what if your investments could generate competitive financial returns and also be used to improve the health of our planet and the wellbeing of the global community? 

The reality is that sustainable investing is going to become 'mainstream'. Once synonymous with negatively screening for 'sins stocks' i.e. tobacco, alcohol, adult entertainment, armaments and gambling, investing with an awareness of global challenges is gaining new found popularity. Sustainable investing now sees investors demanding options that align with their personal values and prioritise environmental, social and governance factors whilst not sacrificing financial return. The socially responsible investing (SRI) market is now estimated to be worth almost $23 trillion globally, with around half of all assets managed in Europe and a third in the United States. Staggeringly, the growth of ESG assets in the U.S. is up over 200% over the past decade.[1]

The options available for clients are growing at an unprecedented rate across all asset classes, as are the number of related indices. The growing consensus across the market over the past few years is that a strong performance across Environmental, Social and Governance metrics (ESG) can be a representation of operational excellence. Companies that make a conscious effort to tackle issues such as resource waste and employee working conditions usually translate these ESG returns into financial ones. Even during economic downturns, an ESG focus can enhance performance as factors such as good governance can feasibly result in lower corporate risk. When one compares traditional equity indices to the MSCI ESG-focused alternatives, it is clear that since 2012, annualised returns for ESG indices have matched or indeed exceeded their counterparts across developed and emerging markets.[2] Sustainable equity portfolios that feature companies that have a strong ESG focus have the potential to outperform the market in the long-term. Sustainable investing can give investors an edge to mitigate risk and in some cases deliver outstanding long-term returns.[3]

Socially responsible investing is not a new phenomenon but, despite its growth, it has traditionally been a niche part of the market. 2019 may be the year where that all changes. Last year, the government released a report entitled 'Growing a Culture of Social Impact Investing in the UK'.[4] The report outlines key recommendations to help encourage the growth of investing that has a positive impact on society as well as producing positive financial returns. Whilst the report focuses on a small aspect of sustainable investing, it signifies the wider change in the public's attitude to investments and shows the UK Government's clear political commitment to supporting the market this year.[5]

A second indicator of sustainable investing's advance towards being considered 'mainstream' is the increasing growth of fixed income ESG product innovation. Bloomberg has reported that the supply of 'green bonds' (bonds that are issued to raise money to tackle specific environmental challenges) is expected to increase more than 60% on 2017 from $155 billion to $250 billion. Of course, when compared to the world's total bond market of nearly $100 trillion, this seems inconsequential, but issuance growth in 2017 and 2018 across all categories remains encouraging.[6]

Long-term thinking is a critical part of ESG and sustainable investing. The U.N. Sustainable Development Goals (SDGs) can be utilised as a framework for guiding investments that make a positive societal and environmental impact.[7] The 17 SDGs were adopted in 2016 by all 193 U.N. member states to work towards a better future for all.[8] The goals comprehensively detail targets and provide tangible indicators of impact to address global challenges such as climate change, education and healthcare. The U.N. estimates that it will require between $5 trillion and $7 trillion dollars a year to achieve the goals by 2030.[9] Crucially, in developing countries alone, the annual investment gap in major SDG sectors is estimated at $2.5 trillion a year. Furthermore, with the current levels of private sector participation, there will be a shortfall of $1.6 trillion to be covered by the public sector.[10] Evidently, a significant acceleration of private investment in SDG sectors is required to aid the UN in meeting its targets. The long-term framework that the SDGs provide has encouraged us at LGT Vestra to engage with investments that not only have a deeply engrained ESG ethos or impact initiative, but investments that also encourage progress by supporting companies that show a measurable engagement with the SDGs.


[1] 'Sustainable Investing is Moving Mainstream'. J.P. Morgan 20/04/18.

[2] MSCI ACWI ESG Screened vs MSCI ACWI. Accessed on 17/12/18.

[3] Friede et al. 2015; Morgan Stanley 2015a; Trunow and Linder 2015.

[4] 'Growing a Culture of Social Impact Investing in the UK'. Department for Digital, Culture, Media & Sport, HM Treasury, Tracey Crouch MP and Stephen Barclay MP. 14/11/17.

[5] Ibid.

[6] 'Blossoming green-bond market growing toward $250 billion year'. Bloom Berg Intelligence. 08/04/19.

[7] 'About the Sustainable Development Goals'.

[8] 'The Sustainable Development Agenda'.

[9] 'Financing for the SDGs: Breaking the Bottlenecks of Investment from Policy to Impact'. UNHQ. 11/06/18. p1.

[10] Ibid.