Companies that invest in clean, green businesses will continue to see better returns due to their ability to adapt to our changing world. Sustainable investing will become the norm.
Sustainable investing is on the rise globally, with assets under management surging from $30.7 trillion in 2018 to $35.3 trillion in 2020, according to the Global Sustainable Investment Alliance (GSIA).
But for investors looking to greenify their portfolio, the choices can be enormous – and often puzzling with continuous confusion around the basics such as what is sustainable investment, how to make sustainability profitable and where the field is headed.
In 2006, the UN launched its Principles for Responsible Investment (PRI), a voluntary initiative to encourage investors to consider ESG issues when making investments. The PRI helped crystallize a definition of what sustainable investment was, and what those who wanted to follow those principles should do to ensure their money is invested wisely.
It took, however, another ten years or so after the release of the PRI for these investment criteria to spread more widely. The Paris Climate Agreement of 2015 was the moment that sustainability became a priority for investors big and small.
As stakeholders have increasingly bought into the importance of sustainable investing, a range of different investment products and opportunities have appeared in the market. Not all of them are as sustainable as others. Natural gas, for instance, was seen as a necessary bridging fuel between fossil fuel reliance and the new world of renewables. Successive redrawing’s of climate targets have made it slip more towards being categorized as a fossil fuel alongside oil.
In recent years, new analysis has been made public to help guide investors. Global finance giant MSCI issues ESG ratings for over 8,500 companies globally. It also provides information on the share of revenue that is in clean investment in a fund.
And the standardization is spreading. Incoming legislation from the European Union (EU) will require investment funds to justify their labelling of a product as ‘sustainable’ with direct reference to EU standards.
Investors are also starting to dig deeper into what the impact of companies on the environment is. We can say some companies have 10% of revenue from green solutions, and another can have 20% – but whose impact is bigger? Leading investors want to take the investigation beyond a simple look at which is the greater number and look at more meaningful changes to the environment.
With more rigour comes more responsibility – and more investor confidence, meaning the adage that you could invest responsibly, or you could make money, but you couldn’t do both, is no longer true. The future of investment won’t look much like the past!