What is sustainable investing and why does it matter?
- Sustainable investing- a concept increasingly becoming mainstream for good.
- A tool to bridge the gap between traditional investment and the environmental responsibilities.
- The green warriors of corporate are bringing trillion dollar transitions in the market.
- Why is it so lucrative for investors, businesses and the market as a whole?
Creating a strong business and building a better world are not conflicting goals. They are both essential ingredients for long-term success. – William Clay Ford, Jr.
As each day passes by, the world is finding itself nearer to the intersection of critical global issues: climate change, carbon emissions, and economic growth in the wake of population explosion. All these changing world orders have instilled the need for value-based investment options among millennials. During the time when countries, governments, and businesses are adapting to functioning in harmony with nature, there is a need for change among the investment world too.
Sustainable investing is the need of the hour. This article will introduce you to every aspect of the lesser-known investment trend that will soon be the driving force of the money market in the future.
What is Sustainable Investing?
Sustainable investing merges traditional investing with environmental, social, and governance-related (ESR) insights to generate long-term financial returns without harmful societal impact. In the 21st century, the investment industry is challenged cohesively by the ever-increasing digitization of the economy, the looming danger of natural disasters, and challenging interest rates.
Sustainable investing makes investors look at sustainable or green investing with the goal to put their money into companies that acknowledge environmental responsibility. This being said, many people question whether investing in green will put any green in their pockets?
“Sustainable investing has moved out of the shadows and into the mainstream. Clients want to know where their money is invested and, increasingly, what the impact is,” – James Purcell, Global Head of Sustainable and Impact Investing at UBS Wealth Management CIO.
Why does the world need it?
The answer to this question lies in the drawback of the traditional investment approach that focuses only on generating profits for shareholders. Continued investments in companies heedlessly leaving behind carbon footprints have led to massive deforestation that depleted flora and fauna, greenhouse amplification, and outrageous quantity of emissions.
With no strategic planning to carry out environmental responsibilities of doing business, sustainable investing has become an impressive solution as it compels to operate in an eco-friendly manner and fill their pockets with green.
It won’t be unfair to call sustainable investors, the green warriors of the corporate world.
Big companies like Cisco Systems, Autodesk, Hewlett Packard Enterprise Co., Loreal, etc. have opted for sustainable investing and are in the list of 2020 Global 100 ranking of the world’s most sustainable corporations. These are a few global companies but think about why they are opting for sustainable investing?
But why would investors transition from traditional investing to sustainable investing?
The reasons can be many-
- Personal values
- Personal goals
- Organizational mission
- Client demand
- Part of a plan
There can be sustainable investors aiming for a strong financial portfolio and targeting better investment practices. Also, there can be some who wish to manage risk and fiduciary duties. Besides this, some professionals might seek financial outperformance over a long period given the fact that climate change is real and whether or not business owners believe in it, it is going to change the face of the world in coming years.
The chance to maintain strong financial performance and align individual values while investing is an attractive option for many people, especially millennials. Because millennials are huge in number, they will be held responsible to disrupt sustainable investing.
Benefits to firms
With socially responsible investing opportunities, firms can ensure good financial returns and can help clients with understanding the associated intrinsic returns that can’t be reproduced. It is these intrinsic returns that strengthen clients’ investment profiles to ensure their long-term appetite.
In the current scenario, financial firms have already started recognizing that this need and value-based investment is growing in demand where wealth and asset managers will be asked to provide products that can outperform and align with their client’s values. A report by Morgan Stanley says, “Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments.”
Adapting to a new method of investment is a challenge for almost everyone, be it companies, asset managers, and investors. But the change can only be brought when existing procedural practices reshape.
Growth of sustainable investing
According to the Forum for Sustainable and Responsible Investment Report (2014), global sustainable investing has reached 107.4 percent to increase AUM from US$1 tn in 2012 to US$4.3 tn in 2014. Moreover, the report confirms that the sustainable investing habit has tripled since 2008 and is estimated to affect 2 billion people by 2050.
The global demand for food, water, energy, clean water, improved sanitation and healthcare, and better transportation will aggravate the need for sustainable investing.
To sum it up!
The earth needs urgent human attention that has been widely affirmed with the ongoing COVID-19 pandemic. We need to build sustainable investment practices that can make future generations breathe in healthy air. In the past few years, asset managers have seen a significant influx of funds into sustainable investment. Moreover, as per EY, the sustainable investment strategy has increased 107.4 percent annually since 2012.
This increment is almost 18 percent of the assets under management (alum) in the asset management industry.
This change is brought about by millennials whose accumulated wealth is used by firms to propel socially responsible investing. Global millennial investors are nearly more interested than the non-millennials to invest in companies that support ESG practices. Ultimately to embrace this change, industries must adapt to the changing competitive landscape through existing processes, training programs, cultures, and technology to meet the prerequisites for sustainable investing. Successful sustainable investing will only be measured by the swift response of the companies to the client’s demand through their robust offerings.