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What Is A Sustainable Investment Management Strategy?


16. December 2020

What is a sustainable investment management strategy?

Sustainable investment management appears to be the new buzz term, but what does it really mean? Surely, we have always wanted a sustainable investment management strategy i.e. investments that endure for the long term and deliver a sustainable return. But is there more to sustainable investing these days?

In this article, Will Oulton, Global Head, Responsible Investment, First State Investments and Patrick Thomas, Head of ESG Investments at Canaccord Genuity, provide their thoughts on sustainable investment management. Patrick runs the Canaccord Genuity ESG Portfolio Service and aims to balance social and environmental responsibility with positive financial performance – which is at the very heart of sustainable investing today.

How do you define sustainability?

There are differing views on the meaning of sustainability – and no global consensus on a definition. The term is derived from the Latin sustinere (to hold; put up with; sustain). Sustain can mean to maintain, to support or to endure – and so can be thought of in relation to activities that:

  • Contribute to the health of the ecosystem
  • Avoid environmental degradation and resource scarcity
  • Promote social equality, health and cohesion.
  • Even more simply put, positively sustainable products, services, activities and behaviours ‘do no harm’. If you want to know more about sustainable investing in practice – click here.

What is driving sustainable investing?

Since the 1940s, economic and financial data superseded all other data – with profit margins and short-term stock prices often driving corporate strategies; and national policies dominated by GDP growth forecasts.

As we now know, profit margins and/or GDP do not tell decision makers anything about the health of a workforce or the environment. They also provide few clues as to the dependencies on environmental and human capital - or emerging trends and opportunities. But it is these very factors on which sustainable investment places a great deal of emphasis - and they are also the factors driving investment returns.

As such, large companies are wising up to the importance of adopting and promoting sustainable business practices - in part due to the influence, affluence and expectations of millennials.

How are millennials influencing sustainable investing?

A key driver of interest in sustainable investment is generational.

Millennials (those born in the 80s and 90s) are much more attuned to sustainability and social justice than any generation before – partly due to social media and partly because sustainability has been taught in schools for some time now.

By 2025, it is estimated that Millennials will comprise 25% of the US population

There are many potential implications to this including:

  • Perceived unsustainable or socially controversial businesses will have difficulty attracting and retaining talent
  • More investment schemes will undergo greater scrutiny of their actual investments by their clients and beneficiaries
  • Social media will enable a greater degree of peer-to-peer investment activity, putting pressure on greater disclosure of environmental and social impacts
  • Millennials will want investment advice on the same terms as they get from other businesses – digitally delivered, socially/environmentally conscious, cheap and networking oriented
  • Millennials’ values and beliefs will create a desire to understand the social and environmental impacts of their investments; this will shape their investment choices and drive more interest in investments which show positive and quantifiable societal impacts, compared to those where such impacts are, at best, unclear
  • Although competitive financial returns will remain important, there is a desire to align investment performance with a positive impact, reflecting the individual’s values.

Will sustainable investing help drive sustainable business activities?

The desire of investors to understand the social and environmental impact of their investments is an important social trend, which is starting to shape the investment industry.

Over the next decade, as the number and affluence of millennials reaches its peak, they will have a major influence. And if investment professionals are to successfully win the trust and business of future generations, they will need to exhibit a higher degree of environmental and social consciousness. When making investment decisions on behalf of clients, they will need to consider how they allocate clients’ capital to sustainable and productive purposes – and carefully balance the impact of their investment activities while delivering a financially positive performance.

As investors increasingly include sustainability in their investment decisions and allocation of capital, this is a strong message for company management in that this is investment that encourages, rather than undermines, the adoption of sustainable business practices by companies – which can only be a good thing for investors, the economy and wider society.

Can sustainable investing deliver long-term investment performance?

According to Will Oulton, sustainable investing aims to not only identify companies that are adapting to changes but are also best placed to profit from it in the long term. Sustainability is becoming big business and is increasingly being identified as a key driver of long-term investment performance.

If you’re thinking about sustainable investing, consider these insights from the Academic Studies:

  • 80% show that the stock price performance of companies is positively influenced by good sustainability practices
  • 88% showed a positive correlation between sustainability and operational performance
  • 90% find a relationship which points to superior sustainability practices reducing a firm’s cost of capital
  • After reporting environmentally positive events, stocks show an average outperformance of 0.84%. Conversely, after negative events, stocks underperform by -0.65%

Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments on both an absolute and a risk-adjusted basis, across asset classes and over time

What is the future of ethical and sustainable investing?

With the rise of the investors wanting to take a more responsible approach, Patrick Thomas provides his thoughts on the future of ethical and sustainable investing. Will it become more mainstream and force companies to respond to changing market demands, such as behavioural transparency?

Can what is good for the planet be good for an investment portfolio? Watch the video below to find out more.

If you would like to discuss how an ESG portfolio may benefit your investment strategy please contact us

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