In this respect, governments around the world are taking action to limit damage to our surroundings. The UK, for instance, has already begun its race towards a legally binding net-zero target, which must be reached by 2050. To start with, and to stay on track, Britain has to halve its emissions by 2030.

While the UK’s efforts are already bearing fruit, as we top the global charts in marine-protected areas and clean drinking water, there are also many other countries paving the way in the field of sustainability. Specifically, according to World Atlas, Denmark, Luxembourg, and Switzerland are currently the world’s environmental leaders. With reduced traffic and air pollution, as well as careful recycling and waste management, they are playing a substantial role in safeguarding our planet.

But it’s not all down to the governments. As businesses, we have a duty of care towards our surroundings too. What can your company do to actively emulate eco-friendly countries? What strategies can you implement to help Britain meet its ambitious targets?

Create a green culture

As a business owner, you should always aim to lead by example. Sharing your ambitions and desire to favour an environmentally conscious workplace can set the tone for your whole team.

In Scandinavia, where sustainability goals are often on top of people’s agendas, companies tend to be very collectivist. This means that managers extend their own green mindset to their business culture and encourage their employees to follow similar eco-friendly practices. These can be simple steps such as switching off lights in unoccupied rooms, cutting down on unnecessary printing, and reducing avoidable food waste.

Therefore, not only is it important to have staff that can perform their jobs to a satisfying standard, it is vital that a team holds the same green ideals as you. Following the example of Japanese multinational Sony, you may want to consider offering your workers some volunteering opportunities too. From protecting the planet to helping disadvantaged people, you will be promoting valuable activities to benefit the environment and vulnerable groups.

Compensate for your emissions

Carbon offsetting is one of the most efficient strategies for companies to minimise their carbon footprint. By compensating for your business’ emissions, you can actively balance out the impact you are having on the planet.

Sometimes, using energy is simply inescapable. Whether it is heating the office, downloading crucial documents, or charging electronic devices, there will be inevitable situations in which you will be releasing carbon dioxide in the atmosphere. Carbon offsetting, in this sense, can help even things out.

In fact, funding green projects elsewhere can reduce the impact of emissions in the workplace. From supporting renewable energy programmes in poorer countries to financing forest preservation, there are numerous ways to make up for your own ‘pollution’. Google parent company Alphabet, for example, has managed to wipe off its lifetime carbon footprint by buying high-quality carbon offsets.

Embrace innovation

Another tool in favour of sustainability is the increasing development of technology. Green countries across the world are relying more and more on technological innovation to tackle climate-change issues. Not only can it give you an edge over competitors, but technology can truly help your business shrink its wasteful and damaging practices.

Innovative software and equipment may be challenging to grasp at first. But it is also fair to say that its advantages outweigh any kind of drawback. To stay in line with companies from leading environmental countries, you should ensure that your own business is introducing technology as a staple of its policy.

Encourage biking schemes

As mentioned, Denmark stands on the podium of the world’s most sustainable countries. Its capital city, Copenhagen, is also one of the planet’s greenest cities. From vending-style machines that reward recycling contributions to electric buses and roads devoted to bicycles, the Little Mermaid’s birthplace is taking all the right steps.

As a business, why not take inspiration from Copenhagen’s promotion of bike routes and schemes? Instead of hopping in your car to drive to work, you could pedal from your home to the office. Public transport or – if you live close enough – a morning stroll are excellent options too. Again, as an owner or manager, you can act as a model and encourage your employees to cycle or walk as well.

By doing so, you will be actively reducing the number of cars on the street, decreasing road congestion, pollution, and both you and your staff’s carbon footprint.

As countries across the globe, including the UK, strive to nullify their carbon emissions in the coming decades, businesses can have their say in sustainability efforts too. Taking a leaf out of green nations’ books, ultimately, can aid your surroundings and limit your company’s impact on the environment.

Sources

https://www.worldatlas.com/articles/the-world-s-most-sustainable-countries.html

https://thesustainablelivingguide.com/most-sustainable-countries/

https://www.theguardian.com/environment/2021/may/04/what-is-carbon-offsetting-and-how-does-it-work

https://www.telegraph.co.uk/travel/discovering-hygge-in-copenhagen/worlds-greenest-city/

https://www.rd.com/list/what-we-can-learn-from-the-most-eco-friendly-countries-on-earth/

https://www.environmentalleader.com/2013/07/worlds-greenest-companies-and-what-we-can-learn-from-them/

https://blueandgreentomorrow.com/environment/things-green-businesses-can-learn-from-scandinavia-on-sustainability/?noamp=mobile

https://www.texasdisposal.com/blog/most-eco-friendly-countries/

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

What is your group’s history with responsible investing?

For more than 30 years, the SRI Wealth Management Group has helped clients to achieve their financial objectives while driving positive social and environmental impact. We are one of the leading financial adviser teams in the country exclusively focused on sustainable, responsible and impact investing (SRI). Our clients want to receive top-quality investment advice and believe their investments are an extension of their mission. We guide our clients through financial uncertainty and can help them to concurrently meet their long-term financial goals while making investments that are in alignment with their organisation’s or personal values.

Our mission is to advance social equity and environmental sustainability using capital markets. While legal or government policy seek to make a change, too often such means can be slowed down by political gridlock. Investors can often have a swifter impact on companies and their behaviour. How often have we seen market valuations be negatively impacted by environmental fines, product recalls or poor management decisions?  We have also seen that companies that have strong labour practices, mitigate environmental risk and pay attention to good corporate governance are quickly rewarded in the financial markets.

Today we consult on approximately $3 billion of assets, all of which are ESG integrated and focused on sustainable investments. In addition to our scale, we have over 30 years of experience in responsible investing starting in 1984, well before responsible investing started to pick up mainstream attention. We have been at the forefront of important social equity and environmental movements: apartheid, LGBTQ+ rights, divesting from fossil fuels and reinvesting in the clean energy economy and racial / gender equity. Along the way, my partner Tom Van Dyck and I have been recognised with top industry awards, including the Financial Times Top 400 Financial Adviser award in 2019, the Forbes/SHOOK Best in State Wealth Adviser award in 2020 and 2021, and with awards from Working Mothers in 2019 and 2020.[1]

The second myth we hear frequently is that responsible investing does not allow for a diversified portfolio. This is completely incorrect!

The responsible investing field has a lot of different terminology and there are a variety of ways to invest for impact. How would you help clarify this for potential investors and what is your group’s approach?

True! As responsible investing has grown and evolved, we as an industry have not done ourselves any favours with respect to jargon! Here is how The SRI Group thinks about it: Sustainable, responsible and impact (SRI) investing incorporates qualitative environmental, social and governance (ESG) factors into investment analyses alongside traditional, quantitative factors to evaluate risks and opportunities that impact an investment’s intrinsic value. ESG factors help identify longer-term risks that eventually turn into financial issues and is a more complete way of investing focused on double bottom line outcomes. Investors should be focused on these longer-term ESG risks as a way to identify good management teams, opportunities and risks. It is a process that can be applied in all asset classes throughout a portfolio. Anyone can focus on quarterly results but as investors, we need to look for other trends that can influence a company’s financial results, such as how companies treat their employees - do they treat them as assets or costs? Studies have shown that employers that treat their employees well can retain and attract talent, leading to less job turnover. This is a very disruptive process in any company, which can lead to a big drain on productivity and therefore financial results. As another example, management teams who are not thinking about the risks and opportunities posed by climate change to their business model can be missing a huge opportunity (or a huge potential problem!).

Integrating ESG into the investment analysis to reduce risk and identify opportunities is just one of several sustainable investing strategies clients can employ to minimise the negative impact on society or to pursue positive outcomes. Another strategy clients use is applying positive and negative screening to the portfolio (i.e. including or excluding certain sectors). Most of our clients are fully divested from fossil fuels - including both the reserves and the rest of the supply chain. We help clients pursue impact investing in companies mitigating climate change and working to transition to the clean energy economy. We also identify impact investment opportunities in community investing and gender / racial equity investing which clients can target alongside financial returns. All asset classes offer opportunities for these targeted initiatives, but the private capital and fixed income asset classes are both popular avenues through which clients invest for very specific outcomes. Shareholder activism is also a popular strategy with clients. This can involve proxy voting or engaging in dialogue with management teams and can be very effective at initiating change. For example, in recent years, shareholders have targeted large oil & gas companies to force them to develop plans to deal with climate change impacts to the environment. We have also seen a large increase in resolutions to increase companies’ disclosure of employee compensation so that gender and racial equity pay gaps are more transparent. You can’t improve what you can’t measure!

What do you want people to know about responsible investing?

 There are a few myths out there about responsible investing, which are worth debunking. Myth #1 is you will sacrifice returns to invest responsibly. The data demonstrates this has not been true historically. The MSCI KLD 400 Index is a responsible version of the S&P 500 and is the longest-running responsible investing index that has been live since 1990. Since its inception, the MSCI KLD 400 Index has outperformed the S&P 500 on an absolute and a risk-adjusted basis. As the field has grown, there have been more and more studies showing responsible investing can offer competitive returns. Morningstar recently analysed companies with high Morningstar ESG ratings in the Large Cap Blend US Equity Fund and ETF category and compared their trailing 3, 5 and 10-year performance as of 31 January 2021 to companies in the same category with low Morningstar ESG ratings. They found that ESG leaders out-performed the ESG laggards on an absolute and a risk-adjusted basis in each of the 3, 5 and 10-year trailing time frames. In our view, this is one of the best ways to invest and we have seen how investing with ESG factors has brought value and appreciation to client portfolios over the years[2].

The second myth we hear frequently is that responsible investing does not allow for a diversified portfolio. This is completely incorrect! ESG investing refers to a process and therefore we can apply that process across all asset classes, geographies, market capitalisations, and industries. We work with our clients to understand their long-term risk and return objectives as well as their near-term liquidity needs so that we are able to construct a tailored allocation to invest given their objectives. Our clients are invested across industries such as retail, healthcare, technology, industrials, etc. They do not tend to invest in oil & gas companies though. We can use environmental, social and governance factors as a part of the investment analysis for companies in any sector and in all asset classes.

The third myth is that ESG investing runs afoul of fiduciary obligations. Several organisations have stated the importance of ESG in satisfying fiduciary duty because ESG investing considers the whole picture of both quantitative and qualitative factors. As an example, the CFA Institute, a global association of investment professionals that offers the respected Chartered Financial Analyst (CFA) designation, said “integrating ESG factors can – and should – be seen as simply being a more complete approach to investing.”

What are the challenges you see with the growth of responsible investing recently?

20 years ago, the options around responsible investing were few and far between. Today, it seems like every financial institution is now offering some sort of responsible investing product because they see a market opportunity. Clients have more options than ever when selecting a responsible investing product, which is a positive development. However, just because the title of an investment product states it is responsible does not necessarily deem it so. For example, we have come across funds that state they are proactively investing in climate change initiatives, only to find several oil & gas companies in the fund. With so many options and choices, we see clients often get confused. Therefore, it is important for clients to work with an experienced investment adviser who has fully researched the investment, including the portfolio management firm and its professionals, the underlying holdings of the funds, and whether or not the investment satisfies a client’s financial goals and values. With so many options today, it pays to find a skilled and experienced financial adviser who can help you navigate through the ever-changing landscape.

Who is ESG investing appropriate for?

We see some demographics, such as women and millennials, as particularly strong in adopting ESG investing, but ultimately, we view it as being appropriate for all institutions and individuals when implemented thoughtfully throughout all asset classes in a diversified portfolio.

RBC Wealth Management recently issued a client study about responsible investing. We learned that more than 60% of clients are interested in increasing the share of ESG investing in their portfolio. While that is an impressive number, the share of women interested in increasing ESG in their portfolio was even higher at 74%! Millennials are also a leading demographic in adopting ESG investing, according to a 2019 report by Cerulli Edge. I think younger people understand it intuitively because they understand the confluence of the environment, economic growth and social justice issues. To them, investing is not just “OK, we’re going to make a ton of money and let’s forget about everything else.” You can’t let externalities fly off all the products and services that you use, or there will be big problems down the road.

While women and millennials get a lot of the attention, adoption has in fact been quite broad. The US Forum for Sustainable and Responsible Investment recently issued its 2020 Report on Sustainable and Impact Investing Trends showing responsible investing in the US growing 42% in just two years, from $12 trillion in 2018 to $17 trillion in 2020. This means that one out of every three dollars in the US is invested with some sort of responsible investing strategy. Our clients include people of all ages, genders, and professions as well as foundations and non-profits. People of all demographics buy certain products because of their values. We vote because of our values. Why shouldn’t we invest our savings—our number one financial asset—based on our values?

*value as of 3/31/2021

Due diligence processes do not assure a profit or protect against loss. Like any type of investing, ESG investing involves risks, including possible loss of principal.

Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.

RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.

[1] The Financial Times 400 Top Financial Advisers is an independent listing produced annually by the Financial Times. The FT 400 is based on data gathered from advisers, broker-dealer home offices, regulatory disclosures, and the FT’s research. The listing reflects each adviser’s status in six primary areas: assets under management (AUM), asset growth, compliance record, experience, credentials and online accessibility. The financial adviser does not pay a fee to be considered for or to receive this award. This award does not evaluate the quality of services provided to clients. This is not indicative of this financial adviser’s future performance.

Source: Forbes.com. Forbes Best-in-State Wealth Advisers ranking was developed by SHOOK Research and is based on in-person and telephone due diligence meetings to evaluate each adviser qualitatively, which is a major component of a ranking algorithm that includes: client retention, industry experience, review of compliance records, firm nominations; and quantitative criteria, including: assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisers rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC and not indicative of future performance or representative of any one client’s experience. Neither Forbes nor SHOOK Research receive compensation in exchange for placement on the ranking. This award does not evaluate the quality of services provided to clients and is not indicative of this adviser’s future performance. The financial adviser does not pay a fee to be considered for or to receive this award. For more information: www.SHOOKresearch.com.

[2] Past performance is no guarantee of future results. It is not possible to invest directly in an index.

Over Q1 2020, out of 206 sustainable equity funds and ETF in the US tracked by Morningstar, 44% were in the top quartile in terms of performance, 70% in the top two and only 11% in the bottom quartile. The performance was good with assets in European sustainable funds down 10.6% in Q1 20 vs. a 16.2% decline in the overall European fund universe. Evidently, ESG and sustainable fund providers (yes even those who ask to be forgiven for investing in fossil fuels until very recently) have aggressively promoted this success. As for stocks, the S&P Sustainable index outperformed overall S&P by 0.9% over the last 3 months in $ terms, clearly benefiting the defensive qualities of such assets in a period of market turmoil.

Yet, the really striking data is to be found elsewhere.

Since inception in September 2007 until end of February 2020, the MSCI ACWI ESG leaders index (largely used in the market as a benchmark) returned 5.24% vs. 4.48% in the broad market. The interesting point here is that this data does not encapsulate March 2020 when sustainable and ESG funds did even better.

We have seen the interest in sustainable investment clearly within our own activity too, during our recent crowdfunding campaign, we secured 300% beyond our target - that being pre-launch and during a global pandemic.

Over Q1 2020, out of 206 sustainable equity funds and ETF in the US tracked by Morningstar, 44% were in the top quartile in terms of performance, 70% in the top two and only 11% in the bottom quartile.

Let’s take a deep dive and see whether outperformance is a happy coincidence or evidence of a long-term trend, to try to anticipate what the future may hold. Our conclusion is not only that sustainable investment is turning mainstream but that it has the basis for a sustained out-performance in the medium-term, irrespective of views on the environmental crisis.

Why the strength of sustainable investment in the recent storm was rationale, not emotional

There are 5 objective reasons why sustainable investment was a recent winner:

1. Sustainable and ESG investment funds nearly always have low exposure to commodities, in particular, Oil & Gas stocks, which were the worst hit during the market crash. So, as a result, sustainable investments were likely to outperform only by virtue of not being commodity exposed.
2. Most sustainable and ESG funds entered the crisis with long healthcare and tech positions. Those were the two sectors that out-performed, which in turn compounded in performance terms the benefit of low exposure to commodities.

I would argue that these two points are pretty uncontroversial.

3. There is a correlation between the quality of management and the sustainability of the business model of companies. Typically, we see that companies whose management has for a long time prepared to pivot towards a more sustainable model ended up with a more resilient business model. This, in turn, protected them to an extent against a collapse of their markets. There is a growing body of academic studies showing a positive correlation between ESG factors and a Company’s Financial Performance (CFP). More than 9 out of 10 companies show this positive correlation according to a recent Harvard research piece. By virtue of linking ESG and CFP, it is possible to establish materiality which is a key factor in our view.
4. It could also be argued that investors anticipated future political developments, with many countries putting the environment at the centre of their recovery programmes. Investors take a risk there but a limited one: calls to base future economic growth on cheap oil and gas have been muted. Investors were very rational in particular in light of the evidence provided by the CBI that clean investment accounted for 1/3 of the economic recovery in the UK post the 2008-10 financial crash. In the next few years, investment opportunities in electric mobility and energy efficiency, to take two examples, could provide a drive towards economic recovery in two key sectors.
5. The collapse of commodity prices, in particular oil, could have been a very negative development making pollution cheaper than in the recent past. Yet again, investors took a very rational view: with oil demand likely never to fully recover from the current crisis (“peak oil”), returns in the Oil and Gas industry are likely to collapse. A few years ago, E&P would yield 25%+ returns, with Brent price below $30/bbl, returns of renewables will at least match those of fossil fuel. Investors have anticipated the move.

What about the medium to long-term?

The future is very positive sustainable investment. Let’s take our five-point format and see the rational arguments for sustainable vs. “traditional” investment in the next decade:

1. Those long-term reasons driving investors mentioned above, in particular, the link between ESG targets and financial performance will not disappear.
2. It is anticipated that billions if not trillions of investment money will leave fossil fuel/ polluting industries and be redeployed towards sustainable investment. This will simply happen because investors want it. It is worth having in mind that, if $2.6trn of investment were moved towards clean energy by 2035 to meet the COP 21 climate change targets, this would imply that c10% of the money invested in pension funds in the western world would leave polluting investments and be redeployed towards cleaner options. A simple demand and supply equation that can only help the relative valuations of sustainable assets. Already $30bn of investment moved towards sustainable investment in 2018, a 30% rise vs. 2016. In the first four months of 2020, in the thick of the C-19 crisis, according to Morningstar $35bn found their way into the European sustainable fund universe, a 50% rise vs. the same period last year. At the same time, the outflow for the overall European fund universe was $170bn.
3. We argue above that more money will be thrown in by Governments, but to an extent, this money is not necessary: wind and solar + storage are now competitive with coal and gas. After years of investments, hydrogen and storage are becoming competitive too. These technologies will amplify the trend towards clean/sustainable solutions not being a moral choice any longer but being the obvious choice based on an objective risk/reward analysis. Which fund manager would want to be invested in a heavily polluting asset when a clean asset delivering the same level of returns is accessible? The risk analysis frameworks are changing quickly for fund managers: clean energy is a way to reduce risks now, not just to diversify.
4. As more and more evidence of the growing environmental crisis emerges, regulations will continue to get tougher with polluters and encouraging sustainable solutions. I see the current US administration as an aberration, not a showstopper. Those who look at the US in detail know that clean energy is progressing quickly.
5. We are making progress so that the definitions around sustainable investment and ESG are becoming clear and investors have frameworks. The EU taxonomy together with the UN SDGs is a solid base fund that fund managers can refer to. In turn, investors can more easily compare fund structures and performance. The situation is far from ideal, but it is so much better than a couple of years ago. Thanks to this growing culture amongst investors, to dig deeper, the most egregious greenwashing will gradually disappear.

Where we could turn to be too optimistic

However rosy this scenario may appear, I can identify three risks that may at least partly derail it. Firstly, traditional polluting industries have benefited over the years from heavy levels of subsidies from governments because they are large job providers. Oil gets $380bn of subsidies a year worldwide, nearly 3 times as much as clean energy (yes, shocking). It will be politically difficult for governments to cut those industries adrift too quickly.

Additionally, while the number of funds claiming to be sustainable is growing exponentially, the number of assets to invest in remains limited. Anyone wishing to invest in zero-carbon power generation in Europe will likely end up investing in Orsted. It is a fantastic company, but it trades on very high multiples (>30x 2021E).

To diversify their portfolio, investors have to consider investing in companies like Enel or Iberdrola who have reduced their emissions drastically but are not zero emitters. This simple example shows the type of dilemma investors will face until they have more assets to invest in that fit tight criteria.

Finally, if big Oil decides to re-direct their investment towards clean energy, they risk overpaying for assets and in turn affecting the value of such assets.

Overall, it’s clear that the positive arguments towards sustainable investment are much more powerful and, having turned mainstream, will be a strong source of performance for investors in the future for decades to come.

For more information, please visit Clim8 Invest's website here.

Here Finance Monthly hears from Kasim Zafar at investment specialists EQ Investors, who looks back at the past decade and considers the investment opportunities we should be considering ahead.

We started the decade with the global economy still reeling from the worst financial crisis in modern times.

Following the failure of the banks, trust in capitalism was then further eroded by the largest financial fraud in US history; Bernie Madoff was imprisoned for 150 years after defrauding clients to the tune of $65 billion.

Extraordinary times called for extraordinary measures. By 2012, most major central banks had slashed interest rates close to zero or below, hoping that ‘free money’ would help the economy heal and return to growth. Trillions of dollars were pumped into financial markets to plug anything resembling a hole. The idea was basic, yet oxymoronic. To save free market capitalism, central banks staged the greatest market intervention of all time.

Sovereign debt crisis

Europe was tested further by its sovereign debt crisis. Despite zero interest rate policies, the rate demanded to fund government debt of the ‘PIIGS’ (Portugal, Italy, Ireland, Greece and Spain) soared between 2010 and 2012, reaching almost 30% in the case of Greece’s 10-year debt.

The European Central Bank created its rescue package to save the European Union from imploding, committing to buy a massive amount of European sovereign debt. Despite this, since the root cause of the problem was too much debt, European governments adopted austerity measures, cutting fiscal stimulus spending.

Quantitative easing in the US put a line under asset prices, first bringing stability and then allowing growth, to the substantial benefit of those with wealth invested. The wave of economic austerity that swept across Europe led to an increase in income inequality and sowed the seeds of populism.

Environmental instability

Distrust of big companies spread beyond bankers like wildfire with the largest environmental disaster in American history. BP’s Deepwater Horizon oil spill in the Gulf of Mexico eventually cost the company more than $65 billion in clean-up costs and compensation.

There was no shortage of environmental tremors. We saw floods on multiple occasions in Pakistan, India, China, Brazil, Thailand and the UK. Hurricanes Sandy, Irma, Maria and Harvey; earthquakes devastated Haiti, Chile, Mexico and of course Japan where in Fukushima we witnessed the world’s second largest nuclear power plant disaster after Chernobyl.

The latest signs of an overheating planet are record temperatures (high and low) across the globe, including fires in the Amazon rainforest and across Western Australia in 2019.

A concerted effort to tackle the climate crisis was finally embraced by 195 governments in the form of the Paris agreement. Last year, the EU declared a climate emergency, no doubt inspired by Greta Thunberg. All legislative and budget proposals will be fully aligned to limit temperature increases to under 1.5 degrees – seen as the danger line for global warming.

Looking forward

The last decade has seen rapid technological advances and we see a number of these coalescing over the next decade. Let’s take a glimpse into the future because we think it’s pretty exciting.

Sustainable finance

Why would you want to invest unsustainably? Now that’s a powerful question. When the rules of the game change, only a fool plays the same strategy.

The next decade is going to see financial markets transform to incorporate a broader set of stakeholders and interests well beyond the bottom line. Legislative changes are already underway in the EU that will significantly alter the reporting requirements for companies and investment products including:

• Climate change mitigation;
• Sustainable water use;
• Transitioning to a circular economy;
• Prevention and control of pollution; and
• Protection of ecosystems.

Although the UK will have exited the EU by the time these rules come into force (around December 2021), we fully expect the UK to adopt similar reporting requirements.

The next decade is going to see financial markets transform to incorporate a broader set of stakeholders and interests well beyond the bottom line.

This will help to establish a common language for what qualifies as sustainable and unsustainable through legislature. The associated data reporting will bring transparency to the conversation and encourage us all to consider the merits of economic activities, particularly those ones which are deemed to be harmful.

AI revolution

A decade ago, we were buying the iPhone 4 and the original iPad had only just been released. The idea of cloud storage and cloud computing was just taking off and the volume of data in the world was estimated to be around two zetabytes – that’s two trillion gigabytes. For comparison, entry level iPhones today have a data capacity of 64 gigabytes. The volume of data in the world has since exploded to around 41 zetabytes. That’s a lot of data! Through analysing these big data sets, we are finding better ways of doing things and finding altogether new things to do.

This is the realm of artificial intelligence (AI). Data scientists are creating sophisticated computer algorithms that identify esoteric features in data of a known entity (such as known ailments in radiology scans). When the algorithms are presented with new images, they are now able to identify things better than their human equivalents. This technology has incredibly wide applications in everything from early stage healthcare diagnoses to logistics route optimisation.

Data and artificial intelligence is being combined with robotics to achieve some pretty incredible feats, often referred to as the ‘internet of things’. Computing power is now decentralised, agile and mobile, freed from the confines of the home and office. The smartphone heralded a new era of fast and interactive data sharing and then the proliferation of sensors has taken things to another level. Everything is being connected: the smart home, smart buildings, wearable consumer devices, remote machine & engine diagnostics and of course, our transportation systems.

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Transforming healthcare

Healthcare is getting better from improved diagnostics, but there are improvements in treatments themselves. Increasingly healthcare is become an exercise in engineering. Biotechnology is developing medicines that are designed to combat specific diseases; treating the cause rather than the symptoms. In the future, it is easy to envisage so called ‘designer drugs’ that are designed for our specific genetics and perhaps beyond a decade from now, we could even be 3D printing these at home.

Precision fermentation

The current world population is 7.7 billion and the UN forecasts we’ll add another one billion people over the course of the next decade. Resource efficiency will be crucial for this to be sustainable, especially to create enough food for everyone. Robotics assisted precision agriculture and partially or wholly embracing veganism will help, but a new technology could change the face of agriculture and food supply altogether. Precision fermentation is the name of the technology behind the various meat alternatives we see in restaurants and supermarkets.

These are synthetic, precision engineered proteins that have similar nutritional value and are approaching cost parity to animal protein. We haven’t synthesised the perfect rib-eye steak yet, but we believe there is a good chance that agriculture will look wildly different in a decade’s time. Could we be looking at the path to ending poverty by then?

Quantum computing

Many of these transformational technologies are based on analysing data using artificial intelligence with computer power that is thousands of times faster today than it was a decade ago, all connected through the digital infrastructure of the internet. There is one problem though. We are approaching the physical limits of computer miniaturisation that has driven the increase in computer power.

However, human ingenuity is pushing through this boundary, developing a new breed of computing. Based on Einstein’s concepts of quantum superposition and quantum entanglement, this new breed of quantum computing would rewrite the rulebook and open the door to… a world of even more new possibilities yet.

From more intelligent healthcare to synthetic steak, the decade promises major developments.

Companies need to do more to stand out from the crowd, especially those in the financial services industry, where competition to attract new business is particularly tough. Here Jason Skidmore, Chief Commercial Officer at 3 Step IT, delves into the growing trend of companies’ focus on their sustainability credentials in an attempt to sway potential customers.

Sustainability is not as difficult or costly to achieve as some may believe. Unlike client hospitality, it is not expensive to save energy or spend less on travel by leveraging remote meetings. In fact, it could save your company money. Making sure that lights are not left on overnight is not a difficult policy to implement, and may resonate with your clients more than you realise.

Sustainability is not only important to your clients, but it also contributes to the satisfaction of your employees. A growing number of employees look for sustainable practices in their place of work, and ensuring you’ve implemented these is a great way to boost employee retention and engagement. This, in turn, boosts the reputation of your company.

As well as being a popular trend to follow, sustainability is also becoming entrenched in law. From 2016, UK companies with more than 500 employees must report on their sustainability by law. Not only does this affect companies themselves, but it also applies to their suppliers - if they are not sustainable, then neither is the buyer.

While you’re reading this article, it’s likely that your competitors are already in the process of tightening their sustainability credentials.

This does not only apply to the UK. Similar, or often stricter, regulations are now in force across Europe. For example, companies in Sweden with more than 250 employees must submit more thorough sustainability reports than those in the UK. This trend is only set to expand, meaning that companies across the globe are growing sensitive to the environmental impact of their operations.

While you’re reading this article, it’s likely that your competitors are already in the process of tightening their sustainability credentials. Time is of the essence if you aim to differentiate yourself. When clients assess your practices, it is not enough to give a new, bespoke response. Assessment frameworks like Ecovadis consider the longevity of sustainability governance and implementation - sustainability is not something you should just consider for the future.

No matter how clueless you feel you are when it comes to environmental matters, there are easy ‘quick wins’ which can be implemented straight away. Replacing disposable cups with glasses and using recycling bins instead of just general waste bins are straightforward ways to reduce waste. Switching the lights off, making sure air conditioning is functioning properly, turning down heating rather than opening windows: these are straightforward ways to lower your office energy bill. You can implement simple, standalone practices like these within weeks. This isn’t where you should stop: then the next step is to develop a sustainability policy with a longer-term focus. A good example of this is a more sustainable perspective for IT equipment.

Replacing disposable cups with glasses and using recycling bins instead of just general waste bins are straightforward ways to reduce waste.

Usually, an office laptop is manufactured, shipped, used until it becomes too slow to be fit for purpose, then recycled, or perhaps thrown away. A new one can cost half a ton of CO2e to manufacture – that's equivalent to producing around 6,000 500ml plastic bottles. Increasing the amount of IT that is reused, rather than recycled, could be the most impactful element of your sustainability policy.

A way to achieve this is to implement a circular economy model and remove, refurbish and resell your old laptop for a second life. Creating your own infrastructure to handle this is impractical, but IT lifecycle specialists can help. They can help make your IT more sustainable and reduce your costs, as you get a share of the equipment value they preserve.

Creating more sustainable business practices isn’t as difficult as you may think, and can help your company to stand out from the crowd. Begin by focussing on the small things your business can do and expand this by incorporating the circular economy. IT lifecycle service providers in the circular economy remove the complexity and security challenges of reducing e-waste. When trying to impress sustainability-savvy clients and potential employees, this part of your sustainability strategy could be what clinches the deal.

The quality and efficiency of financial management services have improved by leaps and bounds after the industry finally decided to embrace the Internet of Things. But as impressive as the changes are, there’s still a lot more to do to meet the expectations of a more demanding client-base. Thus, it doesn’t take much to figure out that future innovations need to focus on more inclusive and interactive models that make the most of available technology.

It’s too early to tell what the future holds for the industry. However, these trends give us a glimpse of how wealth management could look like in the years to come.

A More Digital Industry

Looking back at how “traditional” things used to be for the wealth management industry merely a decade ago, the rapid and strategic digitalization of most firms and companies is nothing short of amazing.

As big and small companies alike prepare for an influx of younger and hipper clients, automation and digital integration become even more essential aspects of their marketing efforts. In fact, industry leaders are already carrying out groundbreaking centralized digital marketing strategies that are pushing the rest to follow their lead.

To thrive, organizations have to rethink and reshape their approaches and decipher how they can use technology to their advantage.

Robo Advisors at Your Service

Witnessing how successful chatbots are at offering 24/7 customer support for many companies around the globe, the financial services industry strives to do the same – if not better – with robo-advisors.

While this can be a huge hit-or-miss situation, it’s a risk worth taking for many asset management firms. Aside from software-based solutions being more cost-effective than traditional investment management, this development has the potential to catch the fancy of millennials who are almost always fascinated with what technology can do.

You can’t deny that digital assistants enhance and empower customer experience. Be that as it may, it's too soon to tell for sure if robo-advisors will ever become competent replacements for human advisors, especially in offering customized and long term investments proposals.

Sustainable Investing Becomes an Even Bigger Hit

The growing interest in sustainable investing is expected to swell in the coming years as more people are encouraged to take socially and environmentally-conscious investments.

Millennials have been leading the awareness campaign towards sustainable investing and its principles; and the overall response has been positive, to say the least.

At the rate things are going, wealth managers will have to pay more attention to impact investments and find a way to incorporate the ESG philosophy into their management approaches, should they wish to attract the millennial market.

The Age of Better-informed Investors

There was very little interest in wealth management pursuits in the past few decades because the majority of the population basically had no idea what it’s all about. Thankfully, things have changed, and they continue to change for the better.

As information and resources on asset management and financial services become easier to access, people from all walks of life are opening up to the concept of investing and becoming more conscious of the state of their financial health.

The future shines bright for the wealth management industry.

Daniel Tannenbaum at Tudor Lodge Consultants talks us through the latest changes in the UK payday loan industry, including new FCA regulation and authorisation guidelines, and what that will mean for the industry. 

The UK’s payday loan industry has seen a huge transformation. The once thriving and highly profitable £2 billion sector has seen major changes to its regulatory framework, advertising and profit margins – causing payday giant Wonga to record losses of £80 million this year and further reverberations for the industry.

New regulation from the Financial Conduct Authority

The FCA began regulating the payday loan industry in April 2014, taking over from The Office of Fair Trading. Following 29,000-payday loan related complaints recorded by The Citizens Advice Bureau in 2014 and pressure from politicians and religious figures to contest usurious rates, and a tough stance was implemented.

The regulator reviewed the practices of the some of the biggest lenders, which inevitably led to £220 million fine for Wonga, £20 million for Cash Genie, £15.4 million for Dollar Financial, and £1.7 million for Quickquid. The fines were partly to the regulator and some amounts were required to refund customers that should not have been lent to in the first place.

To address the high rates of interest, the FCA introduced a price cap in January 2015. This limit on what lenders could charge was fixed to 0.8% per day and ensured that customers will never have to repay double what they have borrowed.

Other rules included a maximum default charge of £15 and no options for rollovers, which commonly caused customers to keep borrowing at high rates even if they were unable to repay their debts.

The enforcement of this price cap has caused much lower profit margins for payday lenders, which trickled down to all other brokers and introducers involved. Notably, the industry-leader Wonga reported a loss of £80 million in 2015.

Authorisation required to continue trading

The FCA required all companies wishing to participate in the payday industry to apply for formal authorization. Firms could apply for interim permission as a short-term solution with the long-term aim to receive full permission provided that the company’s procedures, staff and product had been fully approved by the regulator.

As firms were granted permission in Q1 of 2016, the most responsible lenders have prevailed whilst several lenders and brokers have been forced to exit due to not meeting the criteria or because they do not believe they can be profitable under the new regulation.

Google bans payday loan adverts

To put further pressure on the industry, Google made an announcement in May 2016 that they will be banning all paid adverts on their search engine for all payday loans related products. This includes any loan term that is less than 60 days or has an APR higher than 36%, including logbook loans and guarantor loan products. (Source: GuarantorLoanComparison)

This change will impact hundreds of payday loan lenders and introducers that pay for adverts on Google to generate leads. Instead, they will have to fight for the very limited positions on Google’s organic search listings, which can be tough to break into for new and old entrants.

The future of the industry

The measures that have been introduced are effectively removing the least compliant players from the industry, keeping the most responsible in the game and creating a barrier to entry.

Further adjustments might be made including tighter rules on Continuous Payment Authority, the automatic collection system used by lenders which might be replaced by a simple direct debit.

Other changes involve more loan companies providing long-term loans like Mr Lender and Wonga, that allow you to borrow for up to 6 months with the option to repay early. The FCA has also emphasised the importance of comparison sites to allow borrowers to compare the different costs and options before applying.