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Sustainable investing: An emerging collective conscience

In the past few decades, nations across Asia have achieved remarkable economic progress but social and environmental issues persist. Insufficient access to healthcare and education, widening income inequality, and recurrent climate disasters continue to affect millions of people across the region. Investors can help tackle these challenges by focusing on ESG investing, and demand is growing for ESG-aligned portfolios. But is it possible to enhance risk-adjusted returns and build portfolio value in the long term through sustainable investing? Is it a fleeting trend, or is it here to stay?

In trying to answer the question whether sustainable investing is just a passing fad or a trend that could put the world firmly on the path to a clean and green future, it may be useful to look at one particular statistic: ESG funds saw more inflows in four months in 2020 than in the previous five years combined.

These numbers, highlighted by Andrew Mitchell, Founder, Global Canopy and CEO of Equilibrium Futures at the 2021 Credit Suisse Asian Investment Conference (AIC), underscore the growing awareness of the many challenges we face – from the Covid-19 pandemic to climate change to unequal societies, not to mention the unprecedented loss of the planet’s biodiversity. While most of these issues – outlined in the United Nations’ Sustainable Development Goals (SDG) – have been bubbling over for years, a pandemic-hit world has now been spurred on to address these challenges on a war footing.

And in doing so, we seem to be heeding the remarks of Ovais Sarmad, Deputy Executive Secretary, United Nations Climate Change secretariat, who reflected on the urgency of the problem and noted: “There are significant opportunities to be gained from converting words into action.”

Here to stay

Given the volume of funds that have flowed into sustainable finance in such a short span, it’s natural to question whether this is a bubble in the making. The answer to that is that it’s indeed a secular, long-term trend rooted in fundamental factors, according to Marisa Drew, Chief Sustainability Officer and Global Head of the Sustainability Strategy, Advisory & Finance Group, Credit Suisse.

One of those factors is the emergence of a new generation of consumers and investors intent on doing the right thing, according to Eugene Klerk, Head of Global ESG Research, Credit Suisse. “We should not underestimate this grassroots force,” he argued, noting its power to transform attitudes, business practices as well as regulatory policy. 

Betty Jiang, Head of ESG Research, U.S., Credit Suisse, agreed, observing how asset owners are exerting pressure on asset managers to enhance ESG integration in their portfolios while financial institutions are increasingly mindful of channeling funds to green projects even as central banks are looking to subject their financial systems to climate- related stress tests. “Collectively, the global financial system is realigning itself to meet SDG goals.”

Turns out, ESG also makes sound business sense and the days of investors worrying about sacrificing growth for good are truly behind us. “Anyone who thinks that is 10 years out of date. These things are roaring ahead and I don’t think it will go back. It’s not a bubble,” Mitchell declared. 

This is because ESG principles are a good proxy for companies’ ability to handle adversity, said Phineas Glover, Head of ESG, Asia Pacific, Securities Research, Credit Suisse, noting how ESG funds have consistently outperformed traditional benchmarks. “If you are an ESG leader it will affect how you handle a crisis, and ESG funds pick up on these differentiators better than others.” 

Picking winners

Thematic investing is a strategy aimed at identifying long-term transformative trends and has proved successful at rewarding investors during times of crises like the present. It’s also a key part of the investment strategies of companies like Credit Suisse and BlackRock, which have climate change, ESG and sustainable finance at the core of their thematic frameworks.

Among these big themes are trends like the ongoing government stimulus programs, which Mirjam Staub-Bisang, CEO of BlackRock Switzerland, views as being crucial to fueling a green recovery. “It’s an exciting environment for sustainable investors, for the world and for society as a whole.”

Concurring with Staub-Bisang, Michael Strobaek, Global Chief Investment Officer, Credit Suisse, noted: “We have long believed investors should think beyond country borders and individual sectors, and consider themes that drive societies and economies. Covid has not fundamentally changed our thinking but it has reinforced that thematic investing is important.”

Among the themes Credit Suisse is focusing on are technology and climate change, as well as logistics and energy, especially in the US where President Joe Biden’s administration is expected to focus on overhauling America’s aging physical infrastructure. 

Yet another group of investors keen to capitalize on thematic investing are in the private markets space, which has mushroomed over the past two years as investors look to enhance long-term returns while aligning their investments with positive outcomes for society and the environment. For this group, Staub-Bisang sees a lot of opportunities in healthcare, financial inclusion and education.

“Climate change and sustainable investing is not just a trend, in my eyes it’s a new investment standard. The transition to a net zero economy takes time but it will also bring historic investment opportunities with it, especially in a low-yield environment when both professional as well as private investors are seeking higher returns,” she added.

It’s not just about zero emissions

While efforts to reduce carbon emissions are as admirable as they are necessary, there is a very real concern about the crisis facing the world’s biodiversity, or natural capital, and the need to preserve and enhance.

Referring to issues such as deforestation and overfishing, Mitchell observed: “For a long time, people looked at these as a necessary side effect of development. But the negative effect has begun to catch up with us and started to affect businesses and economies.”

Yet the desire to protect the planet’s ecosystem has lagged behind other SDG goals, and the key hurdle to address this challenge, Drew pointed out, is the lack of metrics that help identify targets and measure progress like we do for carbon emissions or global warming. 

Fortunately, as the stakes have gone up, efforts have ramped up to close the gap. Recognizing that robust stewardship of policies can be a key lever of influence, regulators, industry bodies and other stakeholders around the world are introducing standardized guidelines and metrics, and policy incentives, to drive action, and encourage financial markets to unlock and channel the funds needed to finance the effort.

Central banks around the world, including in Asia, have introduced regulations to address the loss of biodiversity and issues such as land use change and pollution, working closely with financial institutions to set out guidelines to monitor and mitigate environmental risk. 

Such efforts are helping to prove green assets can carry lower risk and enhancing the flow of funds toward sustainability-linked projects. As a result, businesses looking for financing can now apply for grants linked to sustainability targets while investment programs are helping fund managers follow industry-leading practices in green investing.

Other initiatives include frameworks created by the Taskforce on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature-related Financial Disclosures, which together are helping companies, regulators and investors devise ways to measure, disclose and report on the condition of the world’s natural resources. More initiatives are expected in the run-up to and at the United Nations Climate Change Conference in November 2021, according to Mitchell. “At COP 26, you’ll see many governments pushing for nature-based solutions, which will become new areas for investment.”

However, real and lasting change can only be possible with united action, as echoed by Sarmad: "The Covid-19 pandemic showed us how vulnerable and dependent we are on our natural systems. It’s our duty to bring about the transformation the world needs, to reduce CO2 emissions in line with the Intergovernmental Panel on Climate Change (IPCC) projections. Inclusive multilateralism is the only way forward - that means engagement not only of governments but also the private sector as well as civil society."