Banks, pension funds, and global investment houses are now actively screening out companies involved in controversial businesses.
They are shifting investment to companies with high ESG standards and advocating for specific issues like climate change. ESG stands for Environmental, Social, and Governance.
Key drivers in the move to sustainable investing include culture shifts, new regulations, and improved financial returns in these markets.
Pension funds, investment houses, and venture capital providers are concentrating their cash on businesses that are behaving ethically by addressing climate change, clean energy, and resource scarcity, and addressing issues of diversity and human rights in their own organisation and in their supply chains.
The evidence suggests that the long-term returns from such investments are higher, and the risks to capital lower.
A report from Schroders in 2019 said, "Half of all global investors want to back businesses making positive change rather than simply exclude the controversial ones."
There are a number of drivers in the move to sustainable investing:
Changing values: millennials are a particularly strong driving force, with 52% saying they already invest sustainably.
Investors are re-evaluating traditional portfolio approaches, using investment as a positive lever to influence change.
Ambitious net-zero greenhouse gas emissions targets: mean that most sectors are significantly ramping up their decarbonisation efforts to meet these goals.
Strong returns: nine of the eleven ethical funds in the Investment Association UK All Companies sector outperformed the FTSE All-Share index over the last 10-years.
Global sustainability challenges and complex increasing risks associated with "unreconstructed" projects and business are also driving investors in new directions.
Sustainable investing has gained impressive traction in the last few years, with total assets more than doubling from $13tn to over $30tn in just 6 years.
Larry Fink, Chairman, and CEO of Blackrock, recently said:
"With the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward."
Sustainable Investing Actions
Projects that do not place a strong emphasis on sustainability will face increasing difficulties in attracting funds, so you need to start developing business plans that maximise their environmental, social, and governance (ESG) benefits so they will be more attractive to investors.
Projects specifically designed for sustainability and environmental, social, and governance (ESG) benefits deliver stronger returns and, potentially, reduce risk. Focus on those.
Business plans, including financial projections, need to clearly show how they will enhance ESG factors.
The Power of People and Values
My coverage of the move to sustainable investment has already shown that consumer pressure is important. People putting their savings into pension funds or other investments are requiring that their funds are placed in sustainable and ethical programmes.
Large numbers of people in every country – or at least every country where they are free to demonstrate and express their views – want organisations to take more climate-friendly and ethical stances.
Governments, businesses, organisations, cities, and regions are facing unprecedented pressure from new antagonists – inspired, led, and mobilised by new 'do-it-together' global environmental movements like Extinction Rebellion, Greenpeace, Black Lives Matter, and many others.
Millions worldwide have rallied around a common sense of urgency, pressing for urgent action on climate change, human rights, and other business practices; and influencing change through collective action and public and consumer pressure.
A majority of the public now recognise the climate crisis as an "emergency" and say politicians are failing to tackle the problem, and most customers would pay more for sustainability. A survey of 6,000 consumers across Europe, North America, and Asia found:
Over 50% would pay more for sustainable products designed for reuse and recycling.
75% are buying more eco-friendly products than 5 years ago (with 80% planning to buy more).
83% saying it was "important" or "extremely important" for companies to design goods that are meant for reuse and recycling.
A United Nations study found that citizen trust will be critical to business competitiveness in the next five years:
In 2018, UK consumers spent over £83bn on 'ethical goods' with growth driven by increased environmental concern.
49% of under 24's avoided a product or service due to its negative environmental impact.
Investor sentiment is following, recognising the risk to shareholder value from companies with high carbon exposure or poor environmental practices.
The Power of People and Values Actions
One of the slogans of Extinction Rebellion is Power Together, and the power of customers and investors is concentrated on businesses and governments. You must address these needs now:
Your organisation needs to do a full review of its products, services, practices, and supply chains to identify any risk from environmental campaigns, and public and customer dissatisfaction.
The potential impact on revenues, returns, and reputation of "risky" practices needs to be set against the costs and benefits of the redesign.
New product and service development programmes should focus on sustainability and minimising environmental impacts.
Thank you for listening to this lesson. In our next lesson, we address business itself as a force for change and trends in technology.