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Investing for a sustainable future

With large companies wising up to the importance of adopting and promoting sustainable business practices – and with the influence, affluence and expectations of Millennials set to peak over the next decade –  our guest contributor Will Oulton, Global Head, Responsible Investment, First State Investments, considers the impact on the investment industry, and the increasing need to balance social and environmental responsibility with positive financial performance.

In recent years, the notion of ‘sustainability’ has become of increasing interest. Public debate has focused on what constitutes a positively sustainable product or service and what company activities or behaviours can be described as positively sustainable.

However, there are differing views on the meaning of sustainability – and no global consensus on a definition. The term is derived from the Latin sustinere (to hold; put up with; sustain). Sustain can mean to maintain, to support or to endure – and so can be thought of in relation to activities that:

  • Contribute to the health of the ecosystem
  • Avoid environmental degradation and resource scarcity
  • Promote social equality, health and cohesion.

Even more simply put, positively sustainable products, services, activities and behaviours ‘do no harm’.

 

Long-term impact vs short-term profit

Since the 1940s, economic data has superseded all other data – with profit margins and short-term stock prices often driving corporate strategies; and national policies dominated by GDP growth forecasts. As is now well known, profit margins and/or GDP do not tell decision makers anything about the health of a workforce or the environment nor of a nation. They also provide few clues as to the dependencies on environmental and human capital or emerging trends and opportunites. But it is these very factors on which ‘sustainable investment’ places a great deal of emphasis.

Sustainable investing aims to not only identify companies that are adapting to changes, but are also best placed to profit from it in the long term. In response, many companies are spending considerable resources on promoting their own sustainability credentials. For example, Marks & Spencer’s Plan A programme – so called because, as they say, there is no Plan B for the planet.

Sustainability is becoming big business and is increasingly being identified as a key driver of long-term investment performance.

 

5 things you need to know about sustainable investing

If you’re thinking about sustainable investing, consider these findings from recent Academic Studies[i]:

  1. 80% show that the stock price performance of companies is positively influenced by good sustainability practices
  2. 88% showed a positive correlation between sustainability and operational performance
  3. 90% find a relationship which points to superior sustainability practices reducing a firm’s cost of capital
  4. After reporting environmentally positive events, stocks show an average outperformance of 0.84%. Conversely, after negative events, stocks underperform by -0.65%
  5. Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments on both an absolute and a risk-adjusted basis, across asset classes and over time[ii].

 

  • Is sustainable investing a Generation Game?

A key driver of interest in sustainable investment is generational. Millennials (those born in the 80s and 90s) are much more attuned to sustainability and social justice than any generation before – partly due to social media and partly because sustainability has been taught in schools for some time now. By 2025, it is estimated that Millennials will comprise 25% of the US population[iii].

There are many potential implications to this including:

  • Perceived unsustainable or socially controversial businesses will have difficulty attracting and retaining talent
  • More investment schemes will undergo greater scrutiny of their actual investments by their clients and beneficiaries
  • Social media will enable a greater degree of peer-to-peer investment activity, putting pressure on greater disclosure of environmental and social impacts
  • Millennials will want investment advice on the same terms as they get from other businesses – digitally delivered, socially/environmentally conscious, cheap and networking oriented.
  • Millennials’ values and beliefs will create a desire to understand the social and environmental impacts of their investments. This will shape their investment choices and drive more interest in investments which show positive and quantifiable societal impacts, compared to those where such impacts are, at best, unclear. Although competitive financial returns will remain important, there is a desire to align investment performance with a positive impact, reflecting the individual’s values.

 

 Source: Morningstar, US Trust Insights on Wealth and Worth, 2014

Will sustainable investment help drive sustainable business activities?

For the providers of financial products and services, the desire of investors to understand the social and environmental impact of their investments is an important social trend – one that has the capacity to fundamentally challenge the shape of the industry.

Over the next decade, as the number and affluence of Millennials reaches its peak, they will have a major influence. And if investment professionals are to successfully win the trust and business of future generations, they will need to exhibit a higher degree of environmental and social consciousness. When making investment decisions on behalf of clients, they will need to consider how they allocate clients’ capital to sustainable and productive purposes – and carefully balance the impact of their investment activities while delivering a financially positive performance.

As investors increasingly include sustainability in their investment decisions and allocation of capital, this is a strong message for company management in that this is investment that encourages, rather than undermines, the adoption of sustainable business practices by companies – which can only be a good thing for investors, the economy and wider society.

This Financial Promotion has been prepared and is Issued by Will Oulton from First State Investments. Views expressed are their own and do not represent those of CGWM.

Your capital is at risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

Photo of Will Oulton

Will Oulton

Global Head, Responsible Investment, First State Investments (FSI)

Will is responsible for defining and delivering FSI’s responsible investment and stewardship strategy globally. An expert on sustainable investment, Will is also on the board of the UK Sustainable Investment Forum and president of the European Sustainable Investment Forum (Eurosif).


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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

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