As we creep towards the end of a year that has already felt longer than 12 months for most, a notable shift in the mindset of investors could be one positive change to remember 2020 for. Awareness of climate change, and environmental activism, have been gathering momentum across wider society for a number of years.
While David Attenborough and Greta Thunberg have rightly been lauded for their efforts to support the cause, it may be a shift in where HNWs and professional investors invest their money that has a bigger future impact.
A general behavioural trend of millennials and Gen Z towards sustainability is already impacting on the investment strategy of wealthy individuals, family offices and fund managers. The Financial Times reports that for wealthy families the lines between environmental philanthropy and investing for financial return are becoming blurred, with 39 percent of family offices planning to invest the majority of their portfolio sustainably over the next five years.
This movement towards “reducing the temperature” or measuring the environmental, social and governance (ESG) of investments is often attributed to the successful pressure of younger generations. Increasingly, the question for all generations is not what are the hard-headed arguments for sustainable investment but what are the arguments against?
Global political policy suggests that sustainable investment presents a rare opportunity for wealth creation, with trillions of dollars of investment into clean energy alone required if governments are to reach the goals of the UN's Paris Agreement. Joe Biden’s victory in the US presidential election suggests a greener future for the world’s biggest economy with his “Green New Deal”.
Closer to home Boris Johnson speaks of a green revolution to fire the economy of post-Brexit Britain. The political direction of travel suggests further policies, incentives and opportunities to encourage green investment on the horizon. This is a trend that has only been accelerated by the events of this year.
The Covid-19 pandemic has demonstrated the limits of human influence over nature and the disastrous impact environmental events can have on economies and business confidence across the world. Businesses that aren’t serious about their environmental credentials face higher risk and volatility.
During the great sell-off in the first quarter of this year, the ESG leaders in US equities decreased in value by 10.8 percent versus a contraction of 19.6 percent for the market as a whole. When the markets came roaring back, companies and funds with ESG characteristics benefitted, with the Investment Association suggesting investment into such entities in the UK increased by as much as 50 percent when comparing 2020 to 2019.
However alongside the groundswell of optimism, risks and challenges lie ahead. Sustainable investing remains plagued by issues of governance and differing interpretations of how to define what is and isn’t an environmentally sound investment. This can create perverse situations in which fossil fuel dinosaurs can be rated favourably for their environmental impact due to ticking the right box.
This leads to accusations of “green-washing” or of companies paying lip service to the environment as a PR exercise. Focusing in on private equity, a report by Institutional Investorearlier this year concluded that “the vast majority of private equity ESG efforts remain nascent and superficial.”
Seeing past the soundbites and effectively judging assets against environmental criteria will be a defining challenge for investors - whether individual or institutional. Increasing market maturity and sophistication will help to identify what the meaningful metrics to analyse are.
However this will continue to be a clear opportunity for both fund managers and fintech companies to add value to their clients. A combination of technology and expertise allows for greater detailed scrutiny of assets and clears the fog of hazy understanding of ESG credentials.
Dot Investing is an online investment platform created to provide better access for individual investors to private and alternative assets. All of the funds and assets listed on our platform have passed a rigorous process of analysis and assessment.
So although users still make their own final decisions on where to invest, much of the guesswork is taken out of the equation. We want to provide the access that allows our users to build more resilient portfolios - we see offering funds and assets with strong ESG performance as an important piece of that puzzle.
Demand for action on climate change has only accelerated in a year that started in January with out of control bushfires in Australia and is ending with economic activity across the globe still hobbled by the Covid-19 pandemic. This is reflected in the behaviour and strategy of investors.
The push of demands from policymakers and investors for greater environmental scrutiny and the pull of outsized opportunities will ensure that the range of sustainable investment products will only grow.