Some trends are slow burning but certain, some come and go like a bang and others sneak up and are a big thing before people even notice. Apple Computers was around for a long time before it become a must-have stock in a portfolio; the dot-com rise and crash coincided with the Y2K tech company rally but ended in tears almost as suddenly. Cryptocurrencies have snuck up and people are now getting into this asset class of ‘portfolio staple’ when the phenomenal rise is nearly over. How long sustainable investing will last as a philosophy of investment is still to be seen but it has snuck up on investors very quickly indeed.
“Sustainable investing directs investment capital to companies that seek to combat climate change, environmental destruction, while promoting corporate responsibility.” This is the definition offered in Investopedia.com. More specifically, 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.
According to the Global Sustainable Investment Alliance (GSIA), a collaboration of sustainable investment organisations around the world, a full USD 35.5 trillion investments in the 5 of the largest markets in the world: the United States, Canada, Europe, Japan and Australasia, are in sustainable investments- making up 1/3 of all assets.
And these aren’t just retail mutual fund assets that are being counted. The GSIA takes into account professionally managed funds - approximately 36% of total assets under management and includes retail, institutional and wholesale funds. And the fastest growth amongst these have been in the US and Canada to a point where US sustainable assets exceed European assets.
In the words of Kunal Kapoor, CEO of Morningstar- a global investment research firm, “…the world around us has changed. Investors are bringing different values and an entirely different ethos of responsibility to how wealth is invested. And rightly so. As the world struggles with multiple crisis – climate and social unrest, there is a need for all of us to do our bit. If you are fortunate enough to be an investor, perhaps the most impactful thing you can do right now is to focus your investments around sustainability.
Across the globe, we are seeing tremendous growth in sustainable investing. It initially was driven by institutional investors but is gaining traction amongst retail investors too.
A number of asset management companies have launched specific ESG funds…”
But it isn’t an investor led desire to be seen and to become do-gooders with a conscience. This is fuelled by a shift in consumer expectations which- in turn, is leading to strong financial performances. Meaning, demand for sustainable products and production is increasing at a rapid rate as consumers become aware of the consequences of their purchasing decisions. Seeing decades of oil spills damaging marine life and the increase in global warming is pushing demand towards clean energy for everything from cars to homes and offices. Coupled with falling unit production costs in solar, wind, hydro and thermal power people are migrating to the less damaging option. Conscience buying has affected the diamond and coffee markets also, for example, because of the perceived exploitation in the procurement of the raw materials.
One can argue that this is a short-term fad brought on by some sort of global fear psychosis that emerged after forcing a large part of the globe to isolate themselves for extended periods, where all recreational activity was as good as banned for a year and there may be a small element of truth in that. People’s choices in this last year may be a form of penitent behaviour- a heightened sense of panic at the natural disasters unfolding in front of us and feeling that we are somewhat to blame. But it is more likely that it offered a catalytic moment for change.
The science behind human generated carbon emissions leading to the trapping of greenhouse gases and thus raising temperatures is undisputable- despite what many sceptics may say. The ideal solution would be first to reduce our imprint by reducing manufacturing, travel and waste- less consumption overall, especially by the affluent northern hemisphere. The next best solution is to cause the least amount of extractive damage to the environment. Drilling for oil and natural gases which contribute then to heating through their burning to release energy is the low-hanging fruit to address. Furthermore, the huge amount of plastic waste that is clogging up the rivers and oceans is also a cause for concern. So, industries which use waste for power, find ways to eliminate plastic waste or use bio-degradable material in place of plastics are also seeing returns on their investments.
And large research firms, educational institutes, private equity houses are all investing resources into this field- looking for the next avenue to channel funds in an ‘ethical’ field which takes into account the materiality of social and environmental issues- from biodiversity to climate change. Investors are even looking at racial equality as a key issue in considering their decisions. Firms such as Blackrock , educational institutes like NYU Stern are advising their clientele about how to maximise earnings with these additional criteria in mind.
ESG- Environment, Sustainability and Governance, is going to play an increasing role in the world of investments. As noted earlier, it already is significant and the rate at which it is growing means that it will become the default parameters for investment if it continues to grow. There was a period from 2018-2020 where the European component under ESG shrank by USD 2 trillion- from USD 14 trillion to USD 12 trillion, but that wasn’t because of a loss of investor appetite for ESG investments but because of tighter norms against ‘greenwashing’ – labelling initiatives as green when they were not. Nordea Bank says that a full 90% of all investments now flowing into their wealth and asset management (during the 2Q of 2021) unit is marked for ESG investments. The flow is so strong that last month they had to cap the flows into one of their dedicated ESG funds to USD 10 billion because there weren’t enough avenues to deploy the funds so quickly.
Bloomberg Intelligence estimates that by 2025 ESG funds will hit USD 50 trillion- that’s an additional USD 15 trillion in the span of 4 years. This will spark a boom in new industries and/ or a renewal of technology in old industries to make them compliant with ESG norms and is likely to be the main driver in technological innovation and change over the next decade.