The future belongs to sustainable investing: momentum building in the face of a familiar challenge
Our planet is in a bad state, and the economy is a key driver behind this development. That much is old hat. What is new is the momentum with which this is changing, from the Paris Agreement to the breakthrough of sustainable technologies on the market.
This narrative is gaining traction by the day – with palpable consequences for companies and the asset managers that finance them.
Human activity has been transgressing all natural boundaries since the mid-20th century. On average, today’s world population consumes the resources and reserves of 1.7 Earths – in Europe it is around 3. In other words, we are no longer living off nature’s interest, but for years have been drawing down its capital (see chart: “Global ecological footprint”). Needless to say, this is unsustainable in the long term.
People and companies are feeling the physical effects of pollution and climate change. Eight of the current top ten risks to the global economy are either environmental or directly linked to environmental degradation.
This analysis is nothing new. What is, however, is the political and economic fallout. An example of this paradigm shift is the Paris Agreement, signed by nearly every country in the world. The phase-out of fossil fuels within a few decades is thus a fait accompli – and not just on paper either, as the evidence shows:
- Solar and wind power are already cheaper than fossil fuels in many markets, including India, South Africa, the Netherlands, and the US.
- A world without gas and diesel cars? France, the UK, India, the Netherlands, and China are expected to introduce bans on sales between 2030 and 2040. Meanwhile, EU directives and various national laws stipulate that no oil, coal, or gas is to be burned in Europe after 2050 at the latest. In Norway, net CO2 emissions should be phased out entirely by as early as 2032, in Iceland by 2040 and in Sweden by 2045.
- Major investors such as the Norwegian Government Pension Fund are divesting from the coal industry due to high risks. Ireland will become the first country to completely sell off its investments in fossil fuels.
- Major insurers are following suit with their own commitments, including Allianz, Axa, and Swiss Re.
- The European Union has established the High-Level Expert Group on Sustainable Finance, and the Financial Stability Board (FSB) has set up the Task Force on Climate-related Financial Disclosures, proposing recommendations, guidelines, legislation, and related amendments in record time.
- Eight central banks and supervisory authorities (from countries including the UK, Germany, France, Singapore, and China) have come together to form the Network for Greening the Financial System.
- The world’s leading asset managers are frank about how environmental issues loom large when considering investments.
This list could go on and on. These examples show that a new market narrative is taking hold, whereby economic performance must generate net environmental and/or societal benefits. This means that financial flows must be diverted in the manner expressly provided for in the Paris Agreement. Asset managers play a pivotal role in this context by exercising their responsibilities as brokers and custodians. Diverting financial flows in a targeted manner not only presents new market opportunities, but allows hitherto hidden risks to be systematically taken into consideration. Now is the time to act from an environmental, social and above all economic perspective.
Sustainable investing as the business case of the future
Asset managers bear a fiduciary responsibility extending beyond conventional risk management and performance targets. By allocating the capital entrusted to them, they consciously and unconsciously impact on society and the environment. Regulators and clients increasingly expect sustainability risks and opportunities to be actively accounted for, which is why the market for sustainable asset management is growing at a rapid pace. The two main drivers are strong demand from institutional investors and the solid performance of sustainable investments – often incorporating holistic and longer-term risk factors. The ever-increasing variety of sustainable investment products and services, coupled with the sublimation of existing sustainability-related investment approaches, is similarly contributing to market growth.
Not all products with an ESG (environmental, social and governance) label earn this seal of approval: their quality must consistently be measured against their effective and long-term holistic impact on the environment and society. This is crucial for the design, monitoring, and further development of a sustainable investment strategy that goes above and beyond a mere product solution. Without this systematic focus, sustainable investment becomes mere virtue signaling, and will be uneconomic in the new market narrative.