Sustainable investing – The “Attenborough Effect”
According to research this month from the consultancy PwC, assets in sustainable investments will increase their share of the European fund sector by more than three times in the next five years to make up 57% of funds in Europe, overtaking assets in conventional funds.
Currently that figure is 15%. This is an enormous growth in an investment area which up to now has been a bit of a Cinderella of the investment world – quietly getting on with the good work, without making a fuss or being a large part of overall investment assets.
So, what’s driving this huge growth in assets? I think there are probably three things.
First, Cinderella isn’t sitting quietly at home any longer, she is at the ball, drinking ethically sourced champagne and telling people about ESG. People care about ESG, now more than ever. You just have to look at how much more public focus there has been on climate change in the past few years. This spans generations, from David Attenborough showing us the perils of our addiction to using plastics and how this is killing life in the oceans, all the way to Greta Thunberg challenging the existing status quo on the damage we are doing to our planet from our use of fossil fuels and how this is driving climate change. Even politicians are jumping on the bandwagon – the UK now has a tough target to reduce carbon emissions to get to zero carbon by 2050. This summer, for the first time ever – or at least since fossil fuels have been around – half the UK’s energy was derived from zero carbon sources.
Second, there had been a tacit assumption that investing in an ESG-friendly way was good for your morals, but bad for your bank balance. This assumption has been challenged over the past few years with index provider MSCI providing strong evidence that the opposite is true. They show that investing in companies that score well in ESG terms can produce better returns than investing in low ESG scoring companies. So what is the reason for this outperformance?
When a company produces a report on sustainability, which a lot of them do, it is forced to properly soul-search. Does it have fair work practices? Does it treat all stakeholders fairly not just its shareholders? Does it have good governance practices? What is its environmental impact? Falling short in any of these areas means it may be running higher risks than a company which has good ESG practices.
Just one example highlights this: when Volkswagen, the automotive company, was discovered to have cheated in its emissions tests this was a failure of environmental standards, it was failure to treat its stakeholders fairly and a failure of governance. Had good ESG practices been in place, they may have had to admit to higher emissions from their cars but they would not have garnered the opprobrium of the investment world or had to pay enormous fines for cheating. The EU is bringing in a number of core new regulations in sustainability from 2021, putting pressure on companies to integrate ESG across their businesses meaning, hopefully, it will be more difficult for this sort of cheating to happen in future.
Finally, and most importantly, investors have heard what David and Greta have been saying. They have seen the social effects of the COVID crisis on their communities and the world as a whole, and they have been looking for a way to invest their money that takes more account of ESG issues and sustainability than it has done in the past. Some people have said it is the millennial effect – a younger generation taking more interest in climate change and social inequality than those before – but in reality, it is the older cohort which has been buying most of the ESG or sustainable assets. This is what will really drive the investment in ESG or sustainable assets in the next five years and beyond.
At 7IM we have been managing money for clients who want to invest sustainably for over 13 years – through the Global Financial Crisis as well as the recent COVID crisis. Although we consider ESG in all of our portfolios as part of a robust investment process, we also have a more targeted choice for investors. The 7IM Sustainable Balance fund is managed to sustainable criteria, excluding companies from unacceptable business areas such as adult entertainment, alcohol, gambling and tobacco. It focuses on investments in sustainable themes such as climate change, investing in renewable energy infrastructure which delivers electricity to our homes generated from wind or solar rather than fossil fuels.
Any reference to specific instruments within this article does not constitute an investment recommendation.