Sustainable investing has rapidly grown over the last decade. In this article, we talk about the different approaches to sustainable investing and various investment opportunities available to investors.
Over the last decade, sustainable investing has been an exciting growth space in the global financial markets. More and more investment dollars have made their way into sustainable investing driven by the lure of strong returns, better risk management, and positive environmental or social impact.
Globally, total assets under management that now incorporate sustainability considerations add up to $120 trillion. This accounts for nearly a third of all assets under management. A significant 3,750 asset owners and managers representing these assets have signed the United Nations Principles of Responsible Investment (UNPRI) initiative with the objective of promoting responsible and sustainable investing to not only generate high financial returns but do so in a way that benefits the society in the long run.
Also referred to as socially responsible investing, environmental, social, and governance (“ESG”) investing or impact investing), sustainable investing can mean different things to different people. In general, sustainable investing can be segregated across the following three categories:
SRI Exclusions refers to avoiding the negative. It involves excluding investing in companies that have a clear negative impact on society and therefore may not be perceived to be great investments in the long run. Examples of this include tobacco, alcohol, gambling, weapons, etc. Over the last few years, growing awareness about climate change and the role of fossil fuels in feeding the same has led many investors to divest fossil fuels from their portfolios.
ESG Integration refers incorporating environmental, social, and governance considerations into your investment decision with the objective of preferring companies with positive ESG practices. For eg: how does a company treat its employees and the wider community in which it operates, does it engage in corruption and bribery, has there been any known controversies around its operations. Companies with strong ESG practices tend to have a stronger reputation and may achieve higher multiples/valuations in the market. On the other hand, companies with weak ESG practices may be a source of risk for investors. Ongoing scandals and litigation suits at Wells Fargo, a large U.S. bank is a case in point.
Impact Investing leverages positive screening to invest in companies with a measurable positive impact. Several thematic investment strategies fall in this space such as clean energy, electric vehicles, healthcare, sustainable food, sustainable cities, etc. A number of funds also align their portfolios with the UN Sustainable Development Goals.
Institutional investors are also increasingly engaging in shareholder advocacy and proxy voting as a way to influence managements and seek positive ESG outcomes. For eg: Activist Hedge Fund Engine No. 1 recently succeeded in inducting 3 of its nominees on the board of Exxon Mobil Inc., a U.S. energy giant, in order to push the company away from its fossil fuel business model to renewable energy.
Whilst each of these approaches measure impact in a different way, sustainable investing is a way for investors to assess financially material opportunities and risks whilst deploying capital more purposefully.
The chart below shows U.S. sustainable funds with the largest inflows in Q2, 2021 as per Morningstar. Equities tend to capture a lion share of the flows, in general over the last 3 years U.S. equity funds have attracted 75% of sustainable fund flow with the balance going towards fixed income funds. Investors have investment choices across ETFs and actively managed funds.
Globalise also offers curated portfolios with a focus on sustainability and impact themes. For more on this, please reach out to us.
Sustainable investing is here to stay. In 2018, Blackrock CEO Larry Fink titled his annual letter to corporate CEOs, “A Sense of Purpose” arguing that successful companies exist to benefit all their stakeholders and make a positive contribution to society. An analysis by PIMCO on the earnings transcript calls of about 10,000 global companies found the number of ESG mentions have increased from a mere 0-1% up to 2018, to 5% in 2019 and 19% in 2021.
Growing awareness with respect to global sustainability challenges such as climate change, improving regulatory frameworks and new investments by governments (Europe Green Deal, Biden infrastructure plan) are all leading to widespread adoption of sustainable business practices and investing in the financial markets. Investors are enjoying both financial returns and impact, the best of both worlds.
In the current scenario, one question on the minds of both investors and speculators is that are there more opportunities in the commodity space, or is it too late already?
The Russian invasion of Ukraine is the most aggressive military action to happen in the European region since World War 2. From the perspective of the capital markets too, this has been a dramatic event.
Public utilities are an absolute necessity and have predictable cash flows. In this article, we discuss the investment landscape and the key players within the utility sector.