ESG and sustainable investing: beliefs and benefits

The COP26 conference bringing together global leaders to discuss the future of the planet is a clear sign that they are taking decarbonisation and the move to more sustainable capitalism seriously. Policymakers, regulators and consumers are increasingly demanding investments that not only deliver financial returns, but actively contribute to a better world.

Governments are investing huge capital in areas such as decarbonisation, green infrastructure and sustaining biodiversity. There are real opportunities for companies on the right side of change. At the same time there is growing pressure for companies to adopt more sustainable practices.

These forces have conspired to push huge amounts into sustainable investment, particularly in 2020.

ESG and sustainable investing is about doing good for others, as well as yourself

Sustainable investing aims to create or contribute towards positive outcomes (or limit negatives ones) as well as providing financial returns. It may also be described as ESG investing, meaning fund managers take environmental, social and governance factors into account.

Environmental issues are currently a major concern. Veteran naturalist David Attenborough has said: “We are facing a man-made disaster of global scale, our greatest threat in thousands of years: climate change. If we don’t take action, the collapse of our civilisations and the extinction of much of the natural world is on the horizon.” If the world follows its current trend, we face ever-higher temperatures which could ultimately lead to the extinction of humankind and other species.

Most developed governments have signed up to Paris Climate Change Agreement. The agreement sets out a pathway for limiting temperature rises to below 2 degrees Celsius, with action towards that goal accelerated at COP26. There is a clear need to invest in sustainable energy sources to meet these ambitions.

For investors, sustainability is perhaps the biggest megatrend of our time, driving growth in technology and innovation. It is also intertwined with other megatrends, such as a growing, ageing and urbanising population. Longer lives, for example, increase pressure on natural resources, while the shift of populations towards cities focuses attention on clean air. This in turn drives the need to invest sustainably.

ESG investing has evolved from niche to increasingly mainstream

Sustainable investing was once a niche pursuit but has evolved rapidly over the last decade to become increasingly mainstream. It has also moved away from solely negative screening (excluding companies with harmful practices) to more positive analysis, seeking out companies with good environmental practices, waste management or strong social characteristics (such as labour standards and diversity) for example.

Today there is more focus on the impact companies have on the environment and society. Investors are looking for clear intentions and targeted objectives with the United Nations’ Sustainable Development Goals providing a globally relevant blueprint.

There are many reasons to invest sustainably

ESG investing can bring real benefits, primarily the knowledge that your investment is doing good – or at least not doing any harm. And this doesn’t mean sacrificing performance. While past performance is not a guide to future performance, the MSCI World SRI index, which has its highest weighting in companies with good sustainability scores, has consistently outperformed the standard MSCI World index since its 2007 inception.

There are sound reasons for this: companies with weak governance or poor environmental practices tend to be found out. Conversely, companies which truly embed positive ESG practices at all levels are likely to perform better overall.

Interest in sustainable investment runs across gender, age profile and wealth levels.

Millennials tend to lead the way, which could mean higher levels of sustainable investing as money passes between generations. This all serves to support share prices for sustainable investments and depress share price for areas that are not meeting ESG goals.

Regulation is becoming more stringent too. In Europe, for example, the Sustainable Finance Disclosure Requirement has introduced a labelling system for funds. There is an increasing likelihood that sustainable investment will eventually become the norm, with non-ESG funds and strategies gradually phased out.

ESG and sustainable investing mean an ever-increasing range of options

Investors can tailor their approach to meet their principles. More recently, thematic investments have grown significantly, looking at areas such as water, waste or the circular economy. Social trends are also attracting a higher profile – equality, human rights, diversity and inclusion.

Investing sustainably has much to recommend it. It’s good for society and the planet, but it’s also potentially good for investment performance and is a huge growth area. This is a megatrend that is here for the long-term.

If you’re interested in ESG investing you can find out more in our recent webinar, Why invest sustainably. In its Fineco Asset Management Portfolio Manager, Keith Williamson, discusses the main sustainable investing themes and trends as well as what the future may hold.