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 focussed on one thing: financial return. But what if your investments could generate competitive financial returns as well as be used to improve the health of our planet and wellbeing of the global community?

The reality is that sustainable investing is going 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 US. Staggeringly, the growth of ESG assets in the US 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 have translated these ESG returns into financial returns. 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 an 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 social investing that has a positive impact on society as well as producing positive returns. While 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 commitment to politically supporting the market this year.[5]

Long-term thinking is a critical part of ESG and sustainable investing. The U.N. Sustainable Development Goals (SDGs) provide a framework for guiding investments that make a positive societal and environmental impact while delivering financial returns.[7] The 17 SDGs were adopted in 2016 by all 193 U.N. member states and comprehensively detail targets and provide tangible indicators of impact while working towards a better future for all.[8] They 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.

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 specifically target 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 across all categories remains encouraging.[6]

References

[1] ‘Sustainable Investing is Moving Mainstream’ J.P. Morgan [Online Here] 20/04/18

[2] MSCI ACWI ESG Screen vs MSCI ACWI [Online Here] 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. [Online Here] 14/11/17.

[5] Ibid.

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

[7] ‘About the Sustainable Development Goals’ [Online Here]

[8] ‘The Sustainable Development Agenda’ [Online Here]

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

[10] Ibid


This article was created for the DISCUS website by Olivia Woodhead, Sustainable MPS Investment Assistant at LGT Vestra. You can find out more about their investment services on the LGT Vestra dedicated page