The lasting impression that emerged from the global financial crisis of 2008 was one of arrogant bankers recklessly putting other people’s money into all manner of risky and dubious investments. That is, at least, what much of the public sees as the main cause of the financial meltdown. However, while the reality may be somewhat less controversial, the financial services industry has realised that it needs to improve its image if it is to regain the trust of the public.
Sustainable investment practices have suddenly become much more popular among investors in recent years, with more and more people thinking about the effects their financial portfolios are having on the wider world. Although, for many years, socially responsible investing (SRI) was seen as a bit of guilt-reducing window dressing on top of the serious profit-making investments in a portfolio, some reports are now suggesting that they are creating revenue in their own right.
[W]ith investors becoming more conscientious, the industry could be on the cusp of having a seriously positive impact on the rest of the world
Global sustainability
According to a study by the Global Sustainable Investment Alliance (GSIA) released in February, socially responsible and sustainable investments have seen a surge in value between 2012 and 2014 of 61 percent. This meant that total sustainable assets under management were $21.4trn by the end of last year, a staggering increase on the $13.3trn in 2012. They now account for 30.2 percent of professionally managed assets, compared to 21.5 percent two years previously (see Fig. 1).
The report was put together as a collaboration between a number of global institutions, including Europe’s leading sustainable investment body Eurosif and the Japan Social Investment Forum. According to the report, it is Europe where most of this sustainable investing is taking hold, with almost 64 percent of the investments looked at coming from the continent (see Fig. 2).
Announcing the report, Eurosif’s Executive Director, François Passant, said that the growing adoption of sustainable investments was an encouraging sign. “While the growth of European sustainable and responsible assets has been significant over the past few years”, he said, “we are very pleased to see that this growth is a global phenomenon even if most of these assets remain concentrated around few geographies. Just a few months away from the COP 21 Conference in Paris, this signals that more and more investors around the globe realise the materiality of environmental, social and governance factors and echoes some of the current public policy and industry-wide initiatives to foster long-termism and responsible investing.”
The sorts of investments that people are starting to make include renewable energy sources and technologies, as well as microfinance services for the poorest communities in the world. Eurosif’s report concludes that the increasing emphasis on socially responsible investing is spurring investors to be more confident in asking their fund managers to seek out similarly sustainable assets. “The growing visibility of sustainable investing produces a virtuous cycle, in which institutional and retail clients feel empowered to ask money managers for SRI options, and more traditional investment firms are motivated to develop products and services to serve a market that no longer can be characterised as niche.”
Another consequence the report highlights is that companies are recording their sustainable practices in far greater detail than before – highlighting their environmental, social and corporate governance impacts. “The growth in global SRI reflects the consensus among investors that accurate valuations and proper risk management require greater disclosure and consideration of ESG issues such as climate change, human rights, consumer protection and health and safety. Increasingly, managers are using ESG criteria to identify risks that are not adequately addressed by traditional investment analysis and to better predict financial performance. Managers are also using ESG criteria to identify opportunities to invest in sustainable businesses that are involved in energy efficiency, green infrastructure, clean fuels and other sectors that provide adaptive solutions to some of the most challenging issues of our time.”
Morgan Stanley
While organisations like Eurosif have been set up to actively encourage the adoption of sustainable investing, large financial institutions may not look at it with the same enthusiasm. However, a recent study by one of the world’s leading banks suggests the same as the GSIA’s report. US banking giant Morgan Stanley published a report earlier this year that showed how much sustainable investing had grown in the last few years, and why it was now proving to be an attractive area for fund managers to invest money. “A growing number of investors are exploring sustainable investing. In 2012, $1 out of every $9 of US assets under professional management was invested in some form of sustainable investment, primarily in public equities. In 2014 that number increased to $1 out of every $6 – to a total of $6.57trn now invested”, it said.
In the report, which was published in February, Morgan Stanley shows how sustainable investing is becoming a serious proposition for portfolio managers seeking to maximise their profits. It points to a number of factors as being the reason for such investments, as well as the cause of better returns: “A number of drivers, including increasing natural resource scarcity, regulatory pressures, shareholder expectations and board accountability, among others, are likely contributing to some of the positive firm- and investment-level effects we observed.”
In some instances, sustainable investments are even outperforming traditional assets, says Morgan Stanley. It found that 64 percent of sustainable equity mutual funds were either matching or surpassing the average returns of traditional equity funds. They were also proving to be substantially less volatile than normal funds.
The report adds that instead of there being a trade-off between profit and the impact of an investment, investors are finding that they can get a good return while feeling good about themselves financially: “Ultimately, our comparison indicates that investing to create a positive impact does not necessarily require making a trade-off in investment performance; on the contrary, sustainable investments often exhibit favourable return and risk characteristics compared to their traditional peers. We expect that, over time, the fundamental drivers of these performance differences will only grow in importance to investors, both as a way to address important global challenges and to improve investment performance.”
Improving image
The reputation of the global investment community could not have been worse than in the aftermath of the financial crisis. In seeking profit above all else, the industry presented itself as being an uncaring behemoth that had the potential to leave serious damage in its wake. However, with investors becoming more conscientious, the industry could be on the cusp of having a seriously positive impact on the rest of the world.
Audrey Choi, the CEO of Morgan Stanley’s Institute for Sustainable Investing, said that sustainable investing could be an essential tool in solving many of the world’s biggest problems. “We believe sustainable investing will be a key in the mobilisation of private capital towards addressing global challenges, but the growth and development of this space remains hampered by a lingering perception that sustainable investments require a financial trade-off. Our review addresses the investment performance concern head-on, and the findings are very positive.”
In terms of the environment, the news of people’s newfound concern for the planet couldn’t come at a better time. Global energy markets are changing in a way unseen for decades, while renewable energy sources are becoming far more reliable than before. Given the increasingly efficient way environmentally sustainable technologies are operating, for example the solar power industry, investors could propel many of these previously niche assets into the mainstream.
While financial services have traditionally been more concerned with getting the best possible return on an investment, the shifting attitude towards sustainable investments means that now people can bring their values in line with how they use their money, according to Choi. “Sustainable investing presents the opportunity for individuals and institutions to align their investments with their values, but there are clearly many investors who have reservations over whether sustainable investing will require them to sacrifice investment performance. Ultimately, we believe that sustainable investing is simply a smart way to invest, and our review shows preconceptions regarding subpar performance are out of step with reality”, she said.
If this trend proves to be more than just a brief reaction to the wayward behaviour of the financial crisis, then the financial services industry may well be able to promote itself as an engine for good, rather than one of selfish opportunism.
