Sustainable investment pays

The financial fortunes of investors have, in the past, been littered with various trends and failures. Perhaps one of the most noted historically being the South Sea Bubble of 1720 when many investors lost their fortunes and their lives. Today we now have enhanced regulatory scrutiny in place and greater transparency into financial assets and investments, and the trading of slaves – thankfully – is no longer legal.

While as a society and a global economy we have concentrated on the wealth and economic security of the world, this has often been at the expense of our environment and climate. The poorest countries have suffered most from climate change widening the gap between wealth and poverty. Now climate change and societal opinions are also threatening wealthier countries and there is increased interest from governments, financial institutions, and corporates in better tackling this topic.

Most significantly, there is increased interest among investors, both institutional and individual, who recognise that investing in more sustainable products and services drives better outcomes for their returns and for the world they live in. In fact, Bloomberg estimates that ESG assets grew to $30.6T in 2018, a value that is up 60% since 2014 and is estimated to hit $53 trillion by 2025.

A McKinsey & Company report – From ‘why’ to ‘why not’: Sustainable investing as the new normal – also states: ‘More institutional investors recognise environmental, social, and governance factors as drivers of value. The key to investing effectively is to integrate these factors across the investment process.’

Reliable research by Oxford University and McKinsey confirms that good sustainability and ESG practices correlate with lower operating costs, better profitability and superior share price performance.

The role of Financial Services in driving sustainable outcomes

In driving better outcomes for society and the environment, the role of financial services is far greater than governing and reporting on their own ESG performance. It is to steer sustainable development by environmental and socially conscious financing, underwriting, claims management and investment decisions. Regulatory bodies globally now consider financial services firms to be part of the solution to the problem. Reputational damage is also key as seen from the impact of the Rainforest Action Network “Banking on Climate Change – Fossil Fuel Finance Report Card” report which was published in 2019 and states: ‘… the climate crisis demands not just that banks seize the many opportunities for profit in the clean energy evolution, but also that they be prepared to fundamentally redraw their business models away from financing dirty energy. These banks’ clean financing is in any case swamped by the volumes they funnel into fossil fuels.’

There have been some earlier adopters of the climate change and diversity responses from large financial services organisations, and two great examples are:

  • Munich Re: In the 1970s, Munich Reinsurance Company published its first assessments of the dangers of climate change, warning that rising greenhouse gas emissions would alter global systems and could lead to more floods, storms and droughts.
  • State Street Global Advisors (SSGA): In March 2017, SSGA erected “Fearless Girl” in anticipation of International Women’s Day the following day. It depicts a girl four feet high, promoting female empowerment, originally placed staring down the “Raging Bull” of the New York Stock Exchange. Fearless Girl was commissioned to advertise for an index fund that comprises gender-diverse companies.

Stakeholder pressures drive greater focus

Sustainability is at last being taken more seriously in financial services and greater transparency is being mandated by regulators – e.g. the EU Commission’s Taxonomy for Sustainable Investment coming into effect on 2021.

More and more financial services firms are signing up to the UN Principles for Sustainable Banking and PCI Principles for Sustainable Insurance, while there are over 3,000 investment and assets managers singed up to the (UN backed) Principles for Responsible Investment (PRI).

The Bank of England, under its “One Bank Research Agenda” follow up study, assessed how climate change could affect a central bank’s ability to meet its monetary and financial stability objectives. This included an assessment of the linkages between insured and uninsured losses on insurance firms and other financial institutions, such as banks and concluded that climate change, and society’s responses to it, present financial risks which impact upon the bank’s objectives and can cascade through the whole financial system. We should also not forget the potential impact of increased financial crime on the environment and the yet to be understood impact of Covid-19.

Collaboration is needed to avoid “green-washing”

Making and sustaining change will require a true collaboration between governments, financial services firms and corporate organisations. Data and reporting standards must be aligned for full transparency and better decisions. Shared platforms need to be developed to ensure this collaboration is successful and we can expect to see more and more taxonomies as the world gets fully behind sustainable outcomes.

We all need to make and drive better decisions and contribute to improving the world we live in, a world we bequeath to our children and their children. However, pending stronger regulatory governance and reporting and greater consumer awareness, ESG ratings and sustainability claims are exaggerated at best and deliberately misrepresented.

Unilever is a great exemplar for sustainability, having done more than make green investments by making sustainability part of its corporate identity. BrewDog has also made significant investments and launched a series of unprecedented initiatives to help fight climate change, and recently announced it was the first international beer business to become carbon negative.

At the other end of the scale are companies such as Happy Egg Company, which claimed its eggs came from “happy hens” when they are produced by over 4.3m hens in cages.

Please no more “green-washing”. As consumers we are getting too smart to believe in PR spin about how free-range or ethical the products we buy are, how trustworthy the financial firms are that we deal with and how ESG the finds we invest in are – and our world is far too precious for that.

Look out for further articles which will examine more specifically the roles of banks, insurers, and investment managers in driving sustainable outcomes.