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The future of sustainable investing

Climate change and human rights issues have driven a dramatic growth in sustainable investing over the last decade. In 2021, 36% of all assets globally were managed with some form of sustainable link, up from 22% in 20121. Investment levels need to rise further still in order to achieve long-term sustainability targets.

The changing approach to sustainable investing

Recent years have seen a move away from an exclusionary/“do no harm” investment approach, to integrating environmental, social and governance (ESG) assessments within traditional fundamental analysis. With ESG integration now mainstream, an emerging focus is for investments to have real-world impact (i.e. seeking intentional and measurable positive societal and/or environmental benefits) in addition to delivering risk-adjusted returns.

The size of the sustainable market

At a regional level, the United States and Europe continue to account for more than 80% of sustainable investing assets, although Canada, Australia/New Zealand and Japan are showing robust growth.

Global sustainable investing assets by region

Data from a recent survey – of 300 investors, collectively managing almost USD 24 trillion – suggests that the impact of sustainability within asset management looks set to grow further.

Percentage of investors that believe climate change will be a significant factor or at the center of their investment policies within the next two years.

34

Robeco: 2020 Global Climate Survey

84

Robeco: 2022 Global Climate Survey

Beyond traditional asset managers/owners, banks are another major participant in the sustainable investing landscape. Banks accounting for nearly half (around USD 70 trillion) of global banking assets and more than 75% of global fossil fuel financing activity have committed to net zero financed emissions by 2050, while many also have their own sustainable finance targets by 2030. Outside the finance sector, the number of corporates with commitments around net zero targets or with these targets approved by the Science Based Targets initiative has increased more than seven-fold since 2019, to more than 3,500.

Investment needed to achieve long-term sustainability targets

Climate change has been a key area for sustainability-focused investors in recent years, but investment shortfalls remain. According to the Climate Policy Initiative, reaching longer-term climate change targets requires annual investment levels almost seven times the level achieved in 2019-20.

364

USD billion
(2011-12)

632

USD billion
(2019-20)

4+

USD trillion
(2030 required investment levels)

Source: Climate Policy Initiative

Reaching the broader set of Sustainable Development Goals, launched by the United Nations in 2015, requires an increase in annual investment of around USD 11 trillion2, or more than 10% of global GDP.

Investing funding gap for the SDGs

ESG investors face a number of challenges

Despite a positive outlook for sustainable investing, investors will have to deal with a number of challenges. Uncertainty remains as to whether investing in “good ESG” companies actually yields real-world change. Questions have arisen around how to measure a company’s ESG or sustainable performance, and there has been criticism around the approach taken by ESG data and rating companies to help investors in this analysis.

For a number of years, ESG-focused funds outperformed broader markets, but this trend has started to change.

% of ESG funds that outperformed MSCI ACWI during the past 12 months

68

February 2021

23

July 2022

Source: Refinitiv, Morningstar, Credit Suisse

The outlook as sustainable investment matures

The weaker returns posted by ESG funds are likely to increase demand for more substantive ESG research. An aggressive tightening of regulation in this area, not least in Europe, may leave investors and corporates with a significant administrative burden in the short to medium term. In the long term, this will create clarity around disclosure and performance and may, in fact, aid investment decisions.

Investors need to adopt more integrated and sophisticated analytical approaches. Credit Suisse has developed a “Treeprint of sustainable analysis and investing”, comprising 20 (mainly environmental) topics we believe are likely to dominate the investor agenda for years to come.