Sustainable Investing

By September 18, 2018 Economic Analysis
Vivian Hendrikse
 
Sustainable investing is an investment that considers environmental, social and corporate governance (ESG) criteria in order to generate long-term competitive financial returns and a positive societal impact (definition: US SRI). Though its importance has been recognized only recently, data shows that sustainable investing is applied more and more in the global world of business. One example: analyses show that the X dollars (globally) invested in sustainable, responsible and impact (SRI) assets – $8.72 trillion as of 2016 – is 33% higher than in 2015 (US SIF Report 2016). Also, an increasing number of stakeholders of large investment firms express demands regarding sustainability in the investment firm’s portfolios. What are the driving factors behind this large movement, and more importantly: will the movement sustain?
There are three reasons for the large increase that is recognized in the discipline of sustainable investing. First, research clearly demonstrates that sustainable investing enhances portfolios’ returns. The below graph shows a strong growth in the return of a sustainable investing portfolio over a normal one in the past six years. Considering that portfolios that score high on ESG also often have a longer-term vision than portfolios that score low on ESG, one can imply that sustainable investing will not only enhance the portfolio’s yearly returns, but will increasingly enhance the returns in later years. Thus, profitability will continue to rise.
Second, sustainable investment strategies strengthen risk management. As the sustainability aspect of it ensures that an investment will enhance value over time, corporations with these kinds of portfolios are more likely to have the capacity to remain operating in the long-term. Moreover, many of the risks that could derail firms over a long period arise when environmental records are poor: they expose a firm to legal issues or regulatory penalties. Implementing ESG factors in an investment strategy helps to mitigate these risks, thereby improving the overall risk management of a portfolio, and thus, of a firm.
 
Third and last, it appears that sustainable investing is just as much a push from external stakeholders as it is an internal business strategy. According to Morgan Stanley, about 84% of millennials are interested in socially responsible investing. This number is not expected to
change as the generation ages, suggesting that demand for sustainable products is partially driven by millennials joining the investment market and hence it will only increase in the coming years. In order to align strategies with the ones of stakeholders, and the future generation of stakeholders, many firms should incorporate sustainable investing into their business model and build sustainable portfolios.
 
Concluding, it appears that there are large factors driving the movement of increasing usage of the discipline of sustainable investing. Considering the characteristics of these factors, such as the long-term vision, or the push from the younger generation, sustainable investing is expected to increase in the coming years and will, indeed, sustain.

About the author:

Vivian has completed both her bachelor’s degree in International Business Administration and her master’s degree in Finance and Investments at the Rotterdam School of Management. While obtaining experience in investment banking and FinTech, she developed a strong interest in innovations in the financial world and sustainability. With her international work experiences, Vivian is able to recognize trends in Europe and Asia in both sectors and translate these into progressive business strategies.

Sources:

 
Hale, J (2018). Sustainable investing trends for 2018. The ESG Advisor. Available online (link) [Accessed March 2018].
Morgan Stanley. (2017). Millennials and the Democratization of Sustainable Investing. Available online (link) [Accessed May 2018].
Robecosam (2018). Sustainability Investing | RobecoSAM. Available online (link) [Accessed May 2018].
Desclee, A., Hyman, J., Dynkin, L. and Polbennikov, S. (2016). Sustainable Investing and Bond Returns. Barclays, pp.1-40

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