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Sustainable investing in its teenage years

  • By KCV
  • August 25, 2021

A new industry report suggests that COVID-19 has only deepened the pressure to invest sustainably for institutional players. Schroders’ latest look into sustainable investing has revealed that ethical investors aren’t just becoming more common and vocal and more sophisticated.

Schroders’ global head of sustainable investment, Andrew Howard, pinned this development on the pandemic, noting that COVID-19 has only intensified the ongoing spotlight on sustainable investing. According to him, “sustainable investing has grown significantly in recent years, and the resulting attention from investors, regulators and asset managers has been inevitable”.

“Added to the mix is the impact of COVID-19, which has affected all aspects of our lives with sustainable investing, no exception,” he said.

The report also found that pressure from members has risen for sustainable investment behavior among investors, with 51 per cent of surveyed institutional investors highlighting it as the dominant driver for ESG investments.

The report further explains that investors today have many options when it comes to allocating their resources. For example, socially responsible or sustainable investing is a growing trend where individuals can invest in companies whose mission matches their values. It is a way to maximize the benefits for the environment and society at large, not just a small group of shareholders. 

How is sustainable investing different?

Every for-profit business makes it a priority to generate profits. It is what keeps the company going and rewards owners and shareholders. Sustainable investment firms are no different in this respect.

Companies concerned with sustainable investment, however, have additional, measurable factors they consider. For example, analysts and investors consider environmental impacts like water use, conservation, carbon emissions and more. In addition, social factors are weighed, such as community development, anti-bias issues, diversity issues and workplace safety concerns. Finally, governance is also a key factor, including topics like board diversity and corporate political contributions.

Another way that sustainable investing is different is that some investors will not invest in specific industries or companies that do not align with their values. For instance, some people may avoid investing in companies that deal in gambling, alcohol or tobacco industries.

Mr. Howard said that worries about balancing investment sustainability and performance have fallen significantly, but said that greenwashing remained a concern.

On the other side of things, Mr. Howard noted that the COVID-19 has turned a spotlight on the more social elements of ESG investing.

“The crisis has exposed those companies that approach shareholder value as a trade-off against the interests of a wider group of stakeholders, and those which recognize that long-term, sustainable shareholder returns depend on strong stakeholder relationships,” he said.

Doubts persist around how risk is measured and managed when investing sustainably, he said.

“Asset managers cannot afford to approach sustainable investing as a compliance exercise. We need to have a very clear idea and commitment of why and how we approach sustainable investment, what our clients want from us and then apply it to our portfolios,” he said.

Mr. Howard said that sustainable investing remains in its “teenage years” and that asset managers should act accordingly despite its recent growth.

 “We need to ensure that any concerns or challenges our clients may perceive when it comes to investing sustainably are completely allayed, through ever-clearer reporting and disclosures,” he said.

With an emphasis on something beyond pure profit, you might wonder if you can make money with sustainable investing. But, in fact, data shows that sustainable funds outperformed both traditional funds and indexes, on average, according to a 2021 report by Morningstar.

Key takeaway

Sustainable investing is a popular and profitable investment strategy for individuals who want to impact society and the environment.