Environmental, Social and Governance – or ESG – factors are transforming the way that investors and even some of the world’s largest asset management companies are choosing to invest their big bucks.
Something of a perfect storm (yes, that is a climate change pun) has been growing in recent years:
On one hand, consumer attitudes are changing towards financially supporting companies that act in ways they think are “good”. On the other, more Corporate Social Responsibility (CSR) data is available than ever before, showing how companies are actually acting.
Against the backdrop of scientific consensus on the extreme climate situation, this is having a big impact on investment decisions. (It probably helps that these days, investors don’t need to decide between making money and doing something good for the world.)
What is sustainable finance and investment?
Sustainable finance and investment involves prioritising putting money into projects and organisations that have a demonstrated level of environmental or social responsibility and good governance.
More and more investors are using ESG standards to decide where their money is going to go. The attraction of sustainable projects to investors is hopefully going to help drive us all towards Net Zero targets in the next few years.
Why sustainable finance is a thing
1) Changing consumer spending habits
The sustainability drive in finance and investment isn’t a wholly selfless act on the part of investors.
The numbers are in. And they show that ESG-guided investments tend to outperform the market and are likely to provide better opportunities moving forward, making them a better long-term proposition.
More and more consumers are willing to put their money where their mouth is when it comes to the kind of businesses they’ll buy from. I wouldn’t go as far as to say “it’s all the millennials and Gen Z kids doing it”, but surveys show that 4 out of 5 millennials will consider a brand’s CSR practices before they buy.
Over three-quarters of all people in another recent survey said they would stop buying from a company that does something they don’t like. These people would also try to convince others to do the same.
The net result is that 80% of ESG-focused investment funds measured by BlackRock (by far and away the world’s biggest asset managers) in 2020 outperformed more traditional portfolios. You can also check out the example of New Zealand’s state pension fund, which outperformed similar funds by approximately £5.7 billion over the past couple of decades by “going green”.
2) More accessible corporate data
Investing more responsibly is only possible if there is information out there about how various corporations operate.
At the moment, the data that’s out there isn’t always adequate or accurate. That’s why the International Financial Reporting Standards Foundation (the big global accounting body) has set up an International Sustainability Standards Board to start validating some claims businesses are making.
Obviously, now that it’s in the interests of businesses to be perceived as socially responsible, there have been some… surprising claims to responsibility by some… unlikely actors. The different agendas of various actors and unsettled priorities are going to make this a confusing space for years to come.
Yet the availability of accurate corporate data will continue to grow, enabling investors to make more responsible decisions as to where their money ends up. Hopefully, this should enable a much cleaner and more just transition.
Being sustainable with investments isn’t niche anymore
There’s no more need for investors to choose between doing good and making money. Investments that take ESG factors into account are proving themselves not only more moral but also more profitable.
By 2025, the total value of ESG investments is expected to go past £42 trillion, or around a third of all total investments. Even today, organisations like coal, oil, and gas companies are struggling to attract investment capital.
It also looks like investors are going to start wanting more of a say (this is sometimes called “active ownership”) in how companies are run from a CSR standpoint. That’s in addition to the more standard focus on things like shareholder rights.
All in all, not only are sustainable finance and investment here to stay, they’re going to become the default way money is invested. It only remains to be seen whether or not the data that supports such decisions can be made accurate and open enough to make this change in attitudes have the effect that’s needed.
Do you agree? Or do you think sustainability in investment is a flash in the pan?
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