By Ian Lavis on behalf of Praxity Global Alliance
The flow of assets into sustainable funds is breaking records around the world, heralding a sea change in the way we invest.
2020 is set to be a tipping point in global finance. A dramatic increase in sustainable investing suggests corporate companies – and shareholders – are increasingly aware that responsible investing can generate strong returns as well as helping society.
In the United States, investment in sustainable funds increased almost fourfold to a record $21.4 billion in 2019 while in Europe sustainable investment more than doubled to a record €120 billion, according to data specialist Morningstar.
The huge rise in popularity of sustainable funds comes amid rising concerns over global warming and world population growth. It also coincides with changes to the way shareholders view corporations, with increasing focus on responsible behaviour and environmental, social and governance (ESG) factors.
Adrian Frinsdorf, director of Wealth Advisory for Praxity participant firm William Buck in Australia says: “Sustainable investing is becoming incredibly important, especially among younger generations who are telling us they are only interested in sustainable funds.”
In Australia, where the recent bush fires highlighted global climate concerns, there has been a sharp rise in investors seeking exposure to international companies with a focus on environmental sustainability and resource efficiency. “High quality, growth-oriented companies operating within these parameters have generated strong returns,” Adrian states.
Worldwide, big players are clamouring to demonstrate a more sustainable approach. BlackRock, the world’s largest asset manager, has just made sustainability its “new standard” for investing. In a letter¹ to CEOs at the start of 2020, the company’s CEO Larry Fink said “climate change has become a defining factor in companies’ long-term prospects”. Multinational companies² are following suit with commitments to sustainability and carbon reduction. At the other end of the scale, smaller family concerns are looking at more sustainable, long-term options to benefit future owners.
Why the sudden interest? Jon Hale, Morningstar’s director of sustainability investing research, says in a new report³ on sustainable funds in the US: “These moves reflect two overarching issues that have gradually come to the fore. The first is climate change, and the second is the growing critique of the shareholder-primacy view of the corporation. Now, rather suddenly, we seem to have reached a tipping point on both issues.
“More people and more investors are realizing that global warming is a crisis bearing down on us, with significant societal and investment risks. And more people and more investors are realizing that corporate short-termism and focus on shareholder value has not created enough shared value and that a shift toward long-termism focused on creating value for all stakeholders will create more value for both shareholders and society over the long run.”
The trend towards more sustainable, long-term investing is being facilitated, and increasingly driven, by the accounting profession. In Australia, where sustainable investment is focused on companies involved in clean energy, waste management, water, food and agriculture, there has been a rise in demand for accounting professionals with the skills and expertise to identify reputable fund managers, and manage sustainable funds.
“This is a growing investment segment with a number of fund managers emerging,” Adrian Frinsdorf explains. “For our clients, we are interested in those fund managers with a strong track record of performance and an experienced leadership team.”
One such fund manager is Nanuk Asset Management, which operates the New World Fund – a diversified actively managed global equity fund, which has done “incredibly well” for William Buck clients. This type of fund opens up long-term investment opportunities in selected companies across a range of areas including renewable energy generation and storage, sustainable materials and textiles, plant-based protein, waste management technology and electric vehicles. There is also significant interest in funds with exposure to large companies involved in sustainable infrastructure, such as The Japanese Railways Group.
“Clients pay us to be proactive, to provide ideas on sustainable investing, and to look after their financial affairs,” Adrian explains, adding: “We have done a lot of due diligence on the New World Fund. We have also introduced ESG filters on shares.”
While environmentally-focussed sustainable investing has taken off, there is far less interest to date in sustainability funds geared towards companies deemed to have strong social values and good governance. This could be because there are different interpretations of what constitutes ethical or good behaviour in this space. Adrian explains: “We work with charitable funds and the range of what is ethical from one group to another is quite extreme.” However, he points out that those clients most engaged in sustainable investing are those that already had a strong ethical stance.
The focus of sustainable investing may be set to change as pressure mounts on companies to be seen to do the right thing in every aspect of business in the eyes of shareholders and the general public. This could see a rise in sustainable funds providing exposure to companies with the potential to excel across the entire ESG spectrum, from climate change impact to human rights and consumer privacy to board structure, financial reporting and business ethics.
As concerns over ESG grow, and as younger, more environmentally and socially aware generations enter the investment market, sustainable investing is likely to become an increasingly important part of a company’s investment portfolio and a significant chunk of an accounting firms’ advisory service.
It is clear sustainable funds can be a valuable addition to a diverse portfolio and have the potential to reduce overall risk, and provide strong returns, but there are far greater gains to be had for the planet and society as a whole, and this will almost certainly be a key driver in the years to come.
This content draws on an article published by William Buck in February 2020. Please click here for the original article.
¹ BlackRock CEO Larry Fink’s letter
² Fortune media’s list of top sustainability companies
³ Morningstar’s Sustainable Funds US Landscape Report