Sustainable investing – why is it important?
Sustainable investing is also known as socially responsible investing. It’s a way of investing that considers social, environmental, and corporate governance factors. These aspects will be carefully researched before money or resources are contributed to a new venture.
The goal of sustainable investing is to use your resources to promote corporate responsibility, a positive impact on society, and long-term financial gains. Sustainable investing encourages you to look beyond short-term gains and see the broader picture of how companies contribute to society and the world.
You may have thought sustainable investing was simply a do-gooder approach. However, it is emerging as the way forwards. Here are some reasons why you should be paying attention to sustainable investing.
Major investment firms
In today’s world, some of the largest asset firms and investment managers are discussing the value of sustainable investing.
BlackRock have said that; “We are on the front end of a profound, long-term structural shift in global investor preferences toward sustainability that is not fully priced into the market today and may therefore drive outperformance during a long transition period”.
UBS believe that current market conditions may drive the sustainable investing market. They have stated that; “A low-growth and low-bond-yield environment should drive the adoption of [sustainable investing] SI philosophies”.
J.P. Morgan have also chimed in. They have stated that; “We do believe a substantial shift is under way: stakeholders are increasingly pricing in sustainability preferences, which should lead to a reconciliation of ‘sustainable’ and ‘financial’ materiality over the long-term.”
Fund companies
Top fund companies around the world are also getting involved in the sustainable investing game. Fidelity and Vanguard both have sustainable funds. Sustainable funds are growing in number every year.
Reports tell us that in the first half of 2020, 23 new sustainable funds were launched. Since 2016, more than 20 sustainable funds have been launched every year.
Hundreds of funds have been adding sustainability issues to their investment process. According to reports, nearly 500 funds added sustainability criteria to their prospectuses in 2019.
Managing risk
Sustainable investing is a very effective risk-management tool. If companies are well-managed, it’s less likely that they will suffer from public relations disasters. They are also less likely to suffer from boycotts or problems with employees. All of these issues can affect bottom line earnings.
If a company contributes in some way to an environmental disaster, this will have a terrible effect on their stock-market value. Companies that are able to manage sustainable risks are likely to be well run and deal with other risks effectively.
According to a majority of advisors, risk management is the biggest reason why clients with a high net worth like to invest in responsible investments.
Performance
Sustainable investments are able to perform very well. According to this survey, 53% of investors stated that better performance was the primary reason for choosing to invest in sustainable investments.
Studies from Barclays, Morgan Stanley, Deutsche Bank, the UN, Oxford University, and Nuveen TIAA, all suggest that sustainable investing performs equal to, or better than, more conventional investing. These key studies give firsthand evidence of the financial benefit of sustainable investing.
Millennial investors
The chance to invest in assets that have a strong financial performance and also align with your values is extremely appealing to millennials. Millennials are starting to engage with wealth and asset managers. Their influence is going to disrupt the whole financial industry due to the large number of their population. As they inherit wealth, they will exert more and more influence.
As millennials accumulate more wealth, companies will need to make sure that they are aligning their core values with that of the socially responsible investor. Millennials are likely to demand active involvement in their investments and may have activist tendencies.
Millennials recognize inequalities throughout the world. This includes world hunger, climate risk, access to health care, and poverty. This gives them a sense of global responsibility. Ultimately, this is going to drive demand for viable sustainable investments.
A changing culture
Socially responsible practices are becoming practically a requirement for anyone doing business in the investment industry. Corporate culture is being driven towards change. This change needs to happen at an executive level.
This means that companies need to create overarching value statements that make them accountable. These statements should reflect the tenets of sustainable investing. Advisors should be trained on how to have effective conversations with clients around sustainable investing. Communication is key to success.
Advancing technology
Technologies such as the electric car are going to contribute to the cause of sustainable investing. Significant advancements in battery technology will drive the electric vehicle industry forwards. Sales of electric vehicles are predicted to increase dramatically in the coming years, as the vehicles become cheaper and more efficient.
Regulation
Policy makers are seeking to put the global financial systems on a sustainable path. This means directly addressing global inequality and climate change. In March 2018, the European Commission launched an Action Plan on Financing Sustainable Growth. This aims to deliver on promises made during the Paris climate conference.
Regulation is going to drive sustainable investing in a big way. Large governmental bodies recognize the need for large-scale public investment to help drive sustainable initiatives.
The EU has Green Finance regulations in place. This affects investment firms, pension providers, fund managers, and insurance providers. The Green Finance program shows that the EU is committed to sustainability.
In summary
When thinking about asset allocation, sustainable investing should be at the forefront of your plans. Major firms such as BlackRock and JP Morgan are talking up the importance of sustainable investing. Fidelity and Vanguard both have sustainable funds.
Sustainable investing is very important for risk-management and avoiding PR disasters. Multiple studies show the high financial performance of sustainable investments. Millennials are socially and environmentally conscious and are driving a growing cultural change toward ethical investments that align with their values.
Advancing technology, such as electric vehicles, is driving the trend toward sustainable investing. There are also increasing regulations coming in that will demand that companies abide by sustainable practices. This is a swelling tide that will not be stopped.