Sustainable investing doesn’t mean waving goodbye to profit.
Most people like the idea of investing in companies that are keeping climate change and other concerns in mind. However, when it comes down to the nitty gritty there’s often a caveat: ‘…as long as my return doesn’t get affected by it.’
There’s this persistent myth that goes back to the 1980s and ‘90s; you can’t get as good returns when investing in sustainable sectors. In fact, there is little evidence to back those fears.
According to Morningstar, over the past three to five years sustainable funds track records have proven strong with 2018 being a bumper year. Sustainable funds outperformed benchmarks. 63% are in the top half of their categories and just 37% finish in the bottom half of their respective categories for the year. Broader stock market returns in 2018 were the worst since 2008 with bond market returns sitting at the lowest since 2013. So there’s no evidence out there that this is an underperforming way to invest.
There’s a disconnect between the aspirations of the world people want to live in and the behaviour of their capital in the financial markets and their expenditure. Imagine linking people and organisations with capital that ensures investments that reflect the goals and aspirations people have for their world.
Increasingly mainstream fund managers are starting to look at sustainability data more carefully (and as that data improves in quality and quantity). It has become clear that environmental, social and corporate governance (ESG) issues are relevant to values-oriented investors. They are also drivers of corporate financial performance and risk mitigation.
Investors are recognising that ESG issues needed to be incorporated into investments as part of being a good investor. And it doesn’t stop there. Institutional signatories for the UN Principles for Responsible Investment have ballooned to over 1,800. That’s more than half of all global financial assets. The launch of the United Nations Sustainable Development Goals (SDGs) in 2015 demonstrated the scale of the challenge. Over $2 trillion a year is needed for the next 15 years to achieve the SDGs and assist in fixing society’s big problems.
Government investment will only provide a small minority of this. Private capital is needed to do the heavy lifting.
So what’s standing in the way?
There are three main barriers to widespread adoption of sustainable and impact investing:
Sustainable investing is fast becoming mainstream, and yet too many people are either unaware of it or don’t understand how to implement it in their portfolios.
The sustainable investing product set has come on a long way over the last few years. More needs to be done to make it easier to invest. FedGroup has an Impact Farming scheme, borne from the increasing pressure on the national grid, the supply of fossil fuels, and demand for alternative energy sources. Urban solar farming allows individuals to buy a panel installed on a shopping centre or industrial unit. In the way the landlord saves on energy costs investors receive a share of the profit. At the time of writing the price per solar panel was R5,000 and there were 2,000 available to purchase, with an advertised return of 10 – 12%.
There are still plenty of misconceptions when it comes to sustainable investing. Many people think that you have to sacrifice financial returns. In reality you can expect to get the same if not better returns through sustainable investing.
People confuse sustainable investing with philanthropy. They don’t understand how sophisticated the sector has become. Institutional-quality fund managers launch new strategies every year.
We have come a long way since the early 2000s when I entered the renewable energy sector, but sustainable investing is still on the periphery for investors. I believe if we can overcome these obstacles, we will have finally turned sustainable investing mainstream, This is the only wayne can establish the critical link between capital and the aspirations people have for the world.