What do you do?
I work at a think tank focusing on sustainable finance and I provide investors and governments with the knowledge, data and solutions to shift capital towards more sustainable investments. As part of my role, I also provide evidence, using our in-house methodology, that sustainability is not a cost, but a benefit.
How is the market changing?
I am convinced that the integration of sustainability considerations is one of the megatrends that will shape the financial industry. Sustainable investing – also called ESG (environmental, social and governance) or responsible investing – has come a long way from being a niche, and often misunderstood, investment approach, to becoming a widely accepted phenomenon. Also, the reallocation of institutional capital from ‘brown’ to ‘green’ will create a reinforcing loop, where the resulting changes in valuation will encourage an even larger number of market players to jump on the bandwagon of sustainable investing.
All major financial players are setting up their own dedicated ESG impact advisory desks and offering a plethora of financial products in various shades of green. Currently there are $30 trillion assets managed according to ESG principles. Experts estimate that it will reach $170 trillion by 2036. This means that sustainable investing is indeed on its way to becoming mainstream. How will this impact stock market valuations? Will financial organisations indeed drive the climate agenda? It would be an excellent opportunity to address the image problem the financial sector has struggled to overcome since the 2008 financial crisis.
Why do investors care?
The millennial generation will be a significant driving force behind mainstreaming sustainable investing. According to recent studies, they are twice as likely as other generations to make investment decisions based on their values. This is especially important as the spending power of millennials is expected to exceed that of previous generations by around 2025 due to the ongoing intergenerational wealth transfer. The millennial generation will be a significant driving force behind mainstreaming sustainable investing. According to recent studies, they are twice as likely as other generations to make investment decisions based on their values. This is especially important as the spending power of millennials is expected to exceed that of previous generations by around 2025 due to the ongoing intergenerational wealth transfer.
Sustainable investing can also be an attractive investment approach from a pure financial performance perspective. The myth of a trade-off between impact and financial return has been proven wrong by a long list of studies on the subject. Indeed, companies with a high ESG score even tend to outperform in the long term. The energy transition; climate change; new environmental regulations and policies; the recognition of the real cost of externalities can all have an impact on the valuations of companies. Some of the largest institutional investors have already started to divest from certain high-polluting or socially questionable sectors as a result.
What’s the biggest challenge?
It’s important that sustainable investing does not stop at superficial, light-green investment overlays, but achieves meaningful environmental and social impact. Currently $20 trillion of the $30 trillion of ESG-compliant assets follow a negative screening ESG strategy. This means that a portfolio with a simple exclusion of tobacco and weapon manufacturers, while investing in fossil fuels, could be considered ESG investing based on some of the widely used definitions. This is clearly insufficient and raises questions about greenwashing. While there are ongoing initiatives to better define ‘green’, such as the EU’s upcoming taxonomy on sustainable finance, there is currently a lack of regulation and internationally accepted guidelines on when an investment product can be labelled green or ESG compliant.