Sustainable Investing: A Sign of What’s to Come in 2022
Markets are currently abuzz with talk of sustainable investing and all things related to ESG (environmental, social and governance).
However, while the concept has actually been around for some time, it is only in the last few years that sustainable investing was gaining any significant traction. Then the COVID-19 pandemic hit and, as it rippled across the world, many proponents feared the worse for sustainable investing’s trajectory, as governments, regulators and investors switched attention to short term recovery measures.
But the worst did not happen, in fact, quite the opposite. The buzz about sustainable investing has continued to grow louder, as we are increasingly aware of how interconnected we are, but also the glaring inequalities we face. So, what does this mean for us now, as we look beyond the pandemic? 2022 appears to be the year that sustainable investing is set to skyrocket.
Sustainable investing explained
Sustainable investing is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact. Various other terms are often used such as responsible investing, impact investing or ethical investing – while there are nuanced differences, it’s fair to say that the commonality is to achieve positive change, invariably with a social or environmental dimension.
However, sustainable investing isn’t just about avoiding investing in companies that do harm. There is a new class of investors actively seeking out companies that address daunting social and environmental challenges while also delivering financial returns. These companies fall into a wide range of industries and sectors – ranging from food to transportation, from healthcare to education – the universe for sustainable investors is extensive.
Jumping on board
Even as recent as five years ago, the mainstream investment community was largely disengaged from discussions about sustainable investing. These conversations remained firmly within niche corners of the industry. This is shifting dramatically, with most big investors now believing sustainable investing to be good risk management, leveraging the practice to help manage risk in uncertain times. For sure, the COVID-19 pandemic has been somewhat of a game-changer in this regard because it turns out that companies that manage sustainability risks better, manage other risks better as well.
It helps also that some big names are getting more vocal about sustainable investing. Perhaps a pivotal moment happened in early 2020 when Larry Fink in his annual letter famously stated that Blackrock would put sustainability at the centre of its investment strategy. With all this momentum underway, we are going to see investors strengthening their ESG commitments and demand for sustainable and green products growing at a rapid pace.
The role of policy and regulation
There is a great deal happening on the global policy agenda too which is shaping the way many investors are thinking about sustainability. The Paris Agreement on Climate Change gave us a global carbon budget, and we are seeing widespread commitments being made by corporates and investors alike to achieving the Sustainable Development Goals. All this bodes well – and let’s face it, now we have the US back at the table, things are certainly looking up.
On the regulatory front, the European Union is leading the charge, with its Sustainable Finance Action Plan a sea change for investors. This includes new requirements to disclose the sustainability credentials of funds and regulations aimed at boosting transparency. The EU is certainly out front on sustainable finance regulation but countries around the world are watching closely on its success in implementation and are likely to follow suit in the months and years to come.
Looking out for sustainable stocks – what is out there?
The sustainable investing universe is wide and ESG is a broad church. However, as we look to the future certain themes and issues will gain more attention than others. For example, climate change will remain a top priority for many investors. At the end of last year, COP26 pulled together some significant private-sector commitments, particularly around driving trillions of dollars towards climate solutions. The momentum is clear as many large corporates make net-zero commitments, often more ambitious than national commitments. These are the companies that are worth looking at because they are embracing the inevitable.
At the same time, these actions are also being spurred on by a push back against high-carbon companies, especially Big Oil. Last year, a number of global fossil-fuel giants suffered embarrassing rebukes over their lack of climate change action. Investors are taking note and are increasingly willing to force companies to reduce their carbon dioxide emissions quickly.
Interestingly, the pandemic has shone a spotlight on social issues, pushing many investors to reconsider the management of social risks within their portfolios. This elevation of the ‘S’ in ESG is likely to continue. At the same time, the Black Lives Matter movement is bringing into sharper focus the lack of meaningful progress on racial equality and progressive investors are considering what action they can take. Diversity will continue to matter.
Take, for example, the growth and traction of gender-lens investing – an approach that integrates gender-based factors into investment strategy, process and analysis, in order to deliver positive benefits to women and girls. It is a growing sector and attention is not only coming from sustainable and impact investors. The evidence is stacking up as research continues to demonstrate the compelling case for gender diversity in the workforce, for overall economic growth, as well as improvements in innovation and productivity.
Still some challenges to overcome
There are still challenges to overcome to embed sustainable investing as the ‘new norm’. Disclosure and ESG data remain thorny issues, with concern that data is still fragmented, disclosure is inconsistent, and the lack of standardisation holds investors back. We still have some way to go on the regulatory front too – while the EU has been a front runner with its sustainable finance agenda, there are some delays as well as ongoing heated debates.
There is also increasing concern over the issue of greenwashing which is leading investors down the wrong path in some instances. Particularly for retail investors, where many are relying on certain labels such as ‘green’ or ‘SDGs’ or ‘gender diversity’ to guide them in the right direction when they make an investment decision. The problem is that sometimes these labels are not properly assigned, or maybe stretching the trust. This gives the investor a false sense of comfort, not to mention the damage it does to the reputation of the sustainable investment industry.
The important thing is to be aware of ‘greenwashing’ – some companies and funds can do a good job at ‘greenwashing’. Corporate marketing and PR efforts can hide a whole host of sins and this makes the job of sustainable investors even harder. It requires sustainable investors to do their research, check against third-party sources and undertake thorough due diligence.
Reasons for optimism
Despite these challenges, we have many reasons for optimism and 2022 is likely to see a sustainable investing boom. Perhaps one of the most exciting developments is how retail investors are waking up to the sustainable investing trend. Interestingly, research tells us that a lot of this drive is coming from women as well as younger generations. For certain, new audiences and new conversations are to be had – and the finance industry needs to be ready to deliver.
About the Author
Jessica Robinson is a leading expert on sustainable finance and responsible investing, and author of Financial Feminism: A Woman’s Guide to Investing for a Sustainable Future.
Find out more at moxiefuture.com