Clients are helping to drive investments that help rather than damage the environment, and this trend continues to strengthen, the author of this piece, a senior private banker, argues.
A strong theme for the past year – which is quite a feat considering all the geopolitical noise – has been how environmental, social and governance issues (ESG) drive investment ideas for many high net worth clients. ESG is an acronym that pops up with increasing frequency on this and other news channels. Debate continues on whether ESG-themed portfolios outperform other, more conventional ones over the long term, and if there’s a recession or severe market pullback, the robustness of such ideas will be tested. Even so, momentum behind using market muscle to achieve goals such as fighting global warming remains strong.
A firm unafraid to speak its mind, Union Bancaire Privée, discusses such topics. The following article is by Michel Longhini, chief executive of private banking at the group. The editors here are pleased to share these views; they do not necessarily endorse all views of guest contributors and invite responses. If you want to respond, email the editor at firstname.lastname@example.org
Sustainable growth and protecting the planet are compatible. This firm belief earned William Nordhaus and Paul Romer the 2018 Economics Nobel prize. Applied to finance, their premise means that you can in fact have a positive impact on society and/or the environment while generating financial returns.
The first steps into sustainable and responsible investing were taken about thirty years ago. But at first the area’s development was thwarted by its own weaknesses: an unclear scope, its debatable assessment criteria, the so-called greenwashing by some companies, and its somewhat disappointing performances.
While not all these problems have been fully solved, impact investing has learned from past mistakes and has matured. With the support of academic research, impact investing’s scope of application has become clearer and impact measurement more precise, even though there is still room for improvement. What until recently was only a niche segment, perhaps in fact merely a way for investors to relieve their conscience, is now a legitimate and growing allocation in portfolios. Further proof of this is the fact that all established universities now offer master’s programmes in sustainable finance, development, or management. And ever more banks are expanding their ranges of sustainable or responsible investment solutions.
Climate data disclosure
A major incentive for financial service providers to strengthen the credibility and effectiveness of their responsible investment offerings comes from the demand from their clients, especially Millennials. A recent UBS poll in Switzerland showed that 88 per cent of investors want their investments to reflect their personal values. Another good way of raising awareness in the industry is cooperation between peers, but also with public bodies and the academic world, as has been done with the Cambridge Institute for Sustainability Leadership partnership.
Now that addressing environmental and societal challenges has become a priority for all, the movement has gathered momentum and won’t stop.
The campaign is being driven by an increasing number of calls through the Task Force on Climate-related Financial Disclosures (TCFD), created by the Basel Financial Stability Board, to encourage the publication of climate risk statistics alongside performance data.
“Climate-disclosure is becoming mainstream”, Mark Carney, chair of the Financial Stability Board and Governor of the Bank of England, said in September. “Over 500 companies are now supporters of the TCFD, including the world’s largest banks, asset managers and pension funds, responsible for assets of nearly $100 trillion”, he added.
Larry Fink, the CEO of BlackRock, the world’s most powerful asset management company with over $6,000 trillion worth of assets under management, sent a letter early this year to hundreds of CEOs urging them to demonstrate their ability to contribute to society as well as delivering financial returns. Only a company with a long-term purpose can fulfil its potential, he said while threatening between the lines to withdraw BlackRock investment from companies that remained focused solely on the short-term satisfaction of their shareholders. A world leader in passive management as well, BlackRock, is planning to raise the proportion of its assets invested in sustainable exchange-traded funds (ETFs) from $25 billion (3 per cent of the total ETF volume) to $400 billion (almost 25 per cent) by 2028.
Spurring governments to act urgently is, after all, a role finance can play by favouring “good” companies over “bad” ones. Firms that keep feeding climate and societal imbalances through their activities will inevitably see their investors leave. Pension funds, insurers and cities (like New York) are gradually moving away from such companies. Norway’s sovereign fund, for instance, has already cut out all coal investments, and Ireland decided last summer to divest from fossil fuels (oil, gas, coal and peat).
While the underlying catalyst is ethics, these moves are also perfectly sound economically. Responsible companies are the best positioned to attract investment, maintain robust long-term growth, and therefore outperform the market. This is what makes impact investing one of the most promising segments in responsible investing, as its aim is to identify the most innovative companies that make a positive contribution while offering attractive return prospects. By giving as much importance to social and environmental impact as to financial performance, impact investing proves that the two are compatible. And that is the key to preserving the future of our planet.