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Guest blog from Katerva The Rise of Sustainability Investors
The very definition of
sustainability hints towards the long-term, as it involves ensuring that what
we do today will not jeopardise being able to continue doing it many years
hence. It seems plausible to assume that investors who are
interested in sustainability will have not only a longer-term outlook for
themselves but also for the companies that they invest in.
With around $30 trillion invested sustainably, which is typically defined as
investments in businesses that espouse environmental, social, and governance
(ESG) in how they operate, it’s clearly a growing, and hugely influential,
field.
It seems that more and
more business leaders agree with the statement of Salesforce founder and
co-CEO Marc Benioff that, “Yes, profits are important, but so is society. And
if our quest for greater profits leaves our world worse off than before, all
we will have taught our children is the power of greed.” (We will be looking
at sustainability leadership at the individual and organisational levels in
our February newsletter).
New research from the University of Chicago explores just what sustainability
investors want and whether their significant presence can encourage companies
to look and act more sustainably.
The research highlights that sustainability investors typically have a much
longer timeframe for their investments than typical investors, and are
therefore happy to forgo short-term gains in order to hedge climate risk
through their green asset holdings. Data from the Global
Sustainability Investing Alliance shows how increasingly popular this form of
investing is, with 34% growth in the last two years.
Is the tide turning?
The relatively unique approach taken to sustainability investing is
highlighted by the Chicago report, which illustrates that green assets
typically have higher prices today, which usually means they can expect lower
returns in the future. In other words, they might be considered less
attractive investments, but there are at least two factors that influence
such investments to perform better than might be expected.
Firstly, consumers are increasingly interested in the sustainability of the
products and services they consume. While research by Harvard seems to
indicate that there is a gap between intent and action - 65% of participants
indicated interest in purchasing purpose-driven brands that advocate
sustainability, yet less than half declared to actually do so - real market
data paints a different picture. A study using barcode data found that
sustainability-marketed products, accounting for 16.6% of the market, were
responsible for over half of the growth in the period from 2013 to 2018; this
is even more remarkable as growth overall was just over 1% for the same time
period.
This resonates with a 2020 study by IBM:
- Over 7 in 10 consumers say
it’s at least moderately important that brands offer “clean” products
(78%), are sustainable and environmentally responsible (77%), support
recycling (76%), or use natural ingredients (72%).
- 57% are willing to change
their purchasing habits to help reduce negative impact to the
environment, and among those who say sustainability is important for
them, this jumps to 77%.
So changes in consumer
behaviour is one driver affecting performance. The other is changes in the
investment industry itself. To quote from the Chicago study, “If the
ESG factor performed well during a 10-year period, then during that 10-year
period, you could see green assets outperforming brown assets or stocks of
companies that do not specifically embrace ESG criteria,” they explain.
In the past this was clearly to the case. A report published in 2009
highlighted that investors who stay clear of ‘sin stocks’, such as tobacco,
alcohol, etc., often suffer in pure investment terms, in other words, ‘sin
stocks’ tended to outperform more ethical investments.
Looking at more recent evidence, we find that the average UK ethical fund has
outperformed the FTSE All Share index by 40% over the past 10 years and has
even outperformed the average non-ethical fund by an impressive
23%. What's more, ethical funds have performed even better than
this on a global scale, with, for instance, the Liontrust Sustainable Future
Global Growth fund turning a £1,000 investment into £3,670 over the last ten
years.
This strong performance has been underlined by the growth in the number of
ethical funds in operation, with nearly 60 funds now available for investors
who wish to support ethical and sustainable operations.
Changing behaviours
Perhaps most interestingly of all, these investments do seem to be changing
the market, and particularly how companies are behaving: interviews with 70
executives in 43 global institutional investing firms indicate that ESG have
become a priority for the investment community, which means that corporations
will soon be held accountable by shareholders for their ESG performance. As
EY put it in their 2020 report, “When some of the world’s largest
shareholders start asking questions about environmental, social and
governance (ESG) issues at the companies they own, corporate directors need
to have the right answers.”
Indeed, the Chicago
research highlights how ESG investing is resulting in an increase in green
activities in relation to their brown alternatives. This boost is
happening in a couple of ways.
Firstly, ESG investing reduces the cost of capital for sustainable firms,
thus making it easier for them to raise money, which in turn makes it easier
for them to expand their operations. This results in an expansion
of sustainable operations in relation to unsustainable operations, becoming a
virtuous cycle.
Secondly, the influx of ESG investing provides a clear incentive for
companies to act in a greener and more sustainable way because doing so can
clearly increase their market value.
“We think this is good news for society and also for ESG investors,” the
researchers explain. “When people follow these ESG investing strategies, they
have a positive benefit on the world. It’s not just about changing stock
prices.”
The growth in ESG investing also seems to be thriving due to the diversity in
ESG-related tastes. For instance, if there are some interested in
climate change, some in sustainable agriculture, some in renewable energy, or
sustainable working practices, then this diversity lends itself to a
flourishing sustainable investment sector.
“So, in order for some kind of ESG investment industry to exist, you must
have some dispersion in what people care about,” the researchers conclude.
“If people care a lot about ESG, that’s going to push up the price of green
stocks. They’re going to make up a bigger fraction of the overall market.”
Perhaps the 17 sustainable development goals, which span all aspects of life
(and form the basis for Katerva’s award categories), were able to contribute
to an awareness that achieving sustainability is not just about shifting to
sustainable energy, or reducing carbon emissions, it requires action across a
whole range of things. In fact, if we are to succeed with our desire to move
towards sustainability, we need to question and review everything we do, and
how we do it.
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