Some investors have remained focussed on financial performance but there is growing interest in sustainable investing, Emma Pringle writes.
More has been made about sustainable investing in the last few years than in the last few decades combined. Recent general interest in sustainability as well as sustainable investment preferences has catapulted this theme to the front of people’s minds.
New research from BT shows that nine-in-10 Australians think that sustainable investing is important, and conventional wisdom has suggested that it is a misconception that sustainability is only for activists.
So what is sustainable investing? Well before I go further, it is better to explain what I mean by sustainable investing.
Sustainable investing is often used as a broad term encompassing a range of investment approaches. At its heart it’s about ensuring long-term success – of an investment, a company, returns – and the broader systems that support that investment.
I’m not referring here to ethical, green, or socially responsible investing. These investing approaches tend to exclude whole industries which may not be aligned to an individual’s values.
For instance, an ethical investment may preclude all mining companies from its investable universe.
However, a sustainable approach does not narrow a client’s investment universe in the same way.
Using a sustainable investing framework, analysis will look at how a mining company manages its environmental impact, stakeholders, corporate social governance, and its long-term strategy to determine its level of sustainability.
So unlike ethical investing, sustainable investing does not preclude companies solely on the basis of its industry.
This is because sustainable investing is a long-term investment approach that incorporates environmental, social, and governance (ESG) factors.
Sustainable investing is interested in the way a company engages with these non-financial factors.
Overall, it is about how a company makes its money, not just the money it makes.
There are four reasons why your clients might be more interested in sustainable investments than you think.
1. Sustainability delivers the numbers
Common perceptions that say sustainable investing compromises financial performance in favour of social good are purely myth-based.
According to research from the investment boffins at Morgan Stanley, sustainable investments achieved higher profitability and are better long-term investments overall than the performance of comparable traditional investments.
In further support, Barclays recently investigated the relationship between ESG investing and performance in the US corporate bond markets and found that when ESG factors were considered in the investment process, a positive performance outcome was achieved.
2. Sustainable investing is sustainable
Sustainable investing not only assesses a company with respect to how it stacks up against the key ESG factors, but it also looks at the long-term health of a company.
If the company is going gangbusters, but these gains are premised on short-term deliverables without any regard to long-term thinking, then the company in question is not likely to be sustainable.
For example, Unilever is often considered an example of a great sustainable organisation and consistently cited as a leader in its industry.
This is an outcome of not just a desire to improve social outcomes through the company’s Sustainable Living Plan, but also a clearly defined business strategy driving long-term sustainable business growth.
3. Cohorts interested in sustainable investing
Research shows that Millennials and female investors are leading the way when it comes to thinking sustainably.
Millennials are twice as likely to invest in companies or funds that aim to use ESG practices to create a value differentiator.
And 70 per cent of females agree that ESG factors are important aspects to consider when making an investment when compared with 60 per cent of males.
Why? Because sustainability plays a role across many aspects of their lives – they recycle, minimise electricity usage, and buy locally-made goods to support a better and ongoing future for everyone – so why not in their investments?
4. An opportunity to connect with clients’ personal values
If nothing else, sustainable investing is an opportunity to connect with your clients’ values.
For instance, your clients may be passionate about employment conditions or workers, refuse to purchase products tested on animals or have strong views about tobacco – these personal values may also be reflected in their attitudes around how their money is invested and having the option to offer them something that aligns with their values can be a great way to connect.
While some investors remain laser focussed on financial performance, there is sufficient research that points to the growing popularity and interest in sustainable investing more generally.
Having a meaningful conversation with your client can help to connect with your clients, their goals and personal values.
Emma Pringle is the head of sustainability at BT Financial Group.
