Sustainable investing is experiencing strong demand from investors as sustainability themed investments start to demonstrate outperformance over traditional non-sustainable assets. This is coupled with increasing demand from Millennial investors looking to align their choice of asset classes with their environmental and social values, and with long-term trusted fund managers. The combination of both profit and purpose is set to transform sustainable investing.
As Environmental, Social and Governance (ESG) factors become integrated into investment decision-making, they will cement a long-term relationship based on responsibility and trust between investors and fund managers. As global industry sectors make the move to sustainable business models over the coming years, those fund managers who focus on companies at the forefront of this ‘Sustainable Revolution’ will
start to outperform their industry benchmarks, something we are already seeing.
The businesses moving fastest towards sustainability are growing both revenues and profits faster, and are showing share price outperformance. Management teams who are the strongest and most forward-thinking in terms of sustainability, will be the first to exploit new market opportunities and adopt new business models faster. Sustainability is driving outperformance and investors are flocking to fund managers who offer sustainable funds and have strong historic track records.
Climate change is not the only issue causing widespread concern. Other global issues included in the World Economic Forum’s 2018 Global Risks Report are: extreme weather events; biodiversity loss and ecosystem collapse; food and water crises; unemployment and underemployment; large-scale involuntary migration; profound social instability and failure of governance. As the report highlights, all these issues are deeply interconnected.
This poses an operating challenge for businesses globally, and business as usual is not a sustainable option. Understanding this and the materiality of these issues is now at the core of investment approach and ESG integration. Institutions are reacting to the societal expectations demanding ESG integration. A Natixis Asset Management 2017 survey of 7,000 individuals in 22 countries found that 84 per cent of millennials would save more money if they were offered the opportunity to achieve social good.
A UBS/Campden Wealth Global Family Office report in 2017 expected over 40 per cent of Family Offices to increase their allocation towards environmentally friendly investments which will be driven by millennials who will adopt sustainable and impact investing.
The growing need for businesses to evidence social purpose was at the heart of Blackrock Chief Larry Fink’s 2018 letter to CEOs of the world’s largest businesses: “To sustain performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your potential for growth.”
It is clear that moving the dial on these issues in the world of listed equity and fixed income can be a slow process. As a result, some of the most innovative and successful ESG focused fund managers are in private equity with its long term relationships based around trust and track record.