Sustainable investing, green investing or ESG (environmental, social and governance) investing has found many takers in recent times. The world has become more concerned about the fallout of climate change, natural disasters, and manmade health crises on the global economy. So much so that sustainable metrics are integrated into investment decisions when determining what bonds, equities to buy.
Approximately 26% of all managed money in the US is invested using ESG, says Haleh Moddasser, Partner and SVP at Stearns Financial Group based out of Chapel Hill, North Carolina. “However, this is primarily at the institutional level. Recently, however, the demand for ESG by the retail investor has skyrocketed.”
“ESG offers another way, beyond politics and philanthropy, to leverage your voice and your values.”
ESG investing takes into account factors like companies' carbon footprints, employee diversity, labor governance and politics, or accounting practices, among other factors.
The IMF estimates that there are now more than 1,500 equity funds with an explicit sustainability mandate and investors are buying stocks in companies with a good track record in ESG issues. Sustainable funds attracted more than $20 billion till December of last year. The IMF report says that ESG funds perform at par with conventional equity funds. Recently, equity firm BlackRock CEO Larry Fink said in a letter to CEOs that climate change had become a defining factor in companies' long term prospects. He sees a significant reallocation of capital in this direction shortly.
The major trend that will be seen in ESG investments by companies is in the way they see it impacting their bottom line. The focus will shift from how to prevent global warming, carbon footprints, implement sustainable policies, green environment, and diverse equitable policies of governance to how does climate impact us?
The focus will shift on the actual physical risk of long term exploitation of nature and its bounties, the scarcity of water, fossil fuels, and the financial impact of regulations on high-carbon emitting industries. More ambitious carbon-reducing technologies will see massive investments, and instead of governments, increasingly the corporate leadership will be driving the change. The formation of RE100 is a case in point where more than 150 big entities have come together to source 100 percent renewable energy.
"For the first time since WWII we sense a shift in which climate and the environment — not growth — will become the priority of governments and their citizens, as shortages of food, clean water and air become existential questions," Saxo Bank Chief Economist Steen Jakobsen said in his latest quarterly outlook report.
Corporate transparency in ESG based issues and investments will gain ascendency. The United Nations' Principles for Responsible Investment has more than 2,900 signatories from asset managers to institutional investors. Investment agencies and fund managers will screen for ESG in its investment recommendations. Stock exchanges (49) all over the world have committed to ESG disclosure guidelines for all their listings.
The 2020 Global ETF Investor Survey from U.S. private bank Brown Brothers Harriman (BBH) found that almost one in five investors said they would allocate between 21% and 50% of their portfolio to ESG funds in the coming five years. Governments are mandating companies to make full ESG disclosures. They are coming up with subsidies and incentives for companies to go green.
With rules and regulations governing more sustainable growth of industries and investments, companies that are greener and environmentally responsible and adoptive of these trends will be the next big unicorns, predict some analysts.
The AIMA and KPMG conducted a survey of 135 institutional investors and hedge fund managers from 13 countries and found that 84% of managers were interested in ESG-orientated funds.
Growing investor demand (72%), alignment with corporate values (37%) and evidence of material sustainability (35%) were the main three drivers behind increased adoption of ESG strategies, according to the survey, reports CNBC.
Companies are committing to technologies that are innovative and providing more sustainable solutions. Electric vehicles, renewable sources of energy, innovative agricultural methods, construction using sustainable, green and ecologically friendly material, plastic use and recycling techniques to reduce choking the earth and the oceans are the investments that are being sought and followed.
The UN Sustainable Development Goals are expected to be a roadmap for innovation, with revenue and savings opportunities estimated at over $12 trillion per year through 2030.
Corporate boards will have to move into products and markets that are the future, aka sustainability and responsible governance. They will have to be on the alert to identify and manage their ESG risks.
1 lbs of red meat takes about 29 lbs of CO2 to produce. If you multiply this number globally, it’s an incredible quantity of carbon dioxide being produced by the sheer amount of cows in the world. The meat industry, especially the ones that employ concentrated animal feeding operation (CAFO), make up 50 percent of all manmade greenhouse gas emissions.
“Aside from carbon pollution, livestock farming produces run-offs that enter the streams and rivers, filling them with toxins, contaminating the water,” says Casper Ohm, editor-in-chief at Water Pollution. “In other words, by eating plant-based meat you can avoid polluting both our planet's air and water supplies.”
Sustainable investing is now one of the most exciting frontiers for the individual and corporate investor in 2020. “As we have all seen, with the success of Beyond Meat and Impossible Burger, there is a huge appetite for sustainable solutions that will have a positive impact on global, social and environmental challenges,” says Ryan Duncan, founder of Jubilee organics.
Another sector to watch is agriculture, says Duncan. “The consumer is demanding responsibly raised livestock, fruits, and vegetables. Regenerative Agriculture will be an exciting sector to watch as regenerative farms all over the country are beginning to put the pieces together to learn how to generate a good yield, by leveraging the philosophy of commercial agriculture.”
A decade ago, ESG investing was a small part of specialist SRI funds and investment managers serving faith-based clients. One of the most common requirements was to exclude ‘sin stocks’ from the client’s portfolio such as alcohol, gambling and pornography. “Today, major funds and banks are implementing ESG screening of their investments, with checks ranging from exposure to fossil fuels, and human and labor abuses in supply chains, to executive pay and workforce gender balance,” says Robert Blood, founder and managing director of Sigwatch, a global NGO tracking and issues analysis consultancy.
“Strategic response to climate change is becoming the number one indicator distinguishing acceptable from unacceptable investments – even for oil and gas companies,” says Blood.
This has led to the rise of ESG indexes and rating services to quantify the differences between strong and weak performers. Companies like Sigwatch are now helping investors fill the gap by providing data from campaigning groups which have no vested interest in the companies that are criticizing or praising.
While the jury is still out, the wild success of companies like Tesla and Impossible Burger has proved that investors want to pump sustainable- and ethically-responsible companies’ stock to the moon.