Sustainable investing does not mean waving goodbye to profit
When I first got involved in sustainable investing in the early 2000s, it was a tiny, retailfocused industry where it was mostly about removing the “bad companies” from your portfolio. I was working for an Australian NGO campaigning to protect Tasmania’s old growth forests and one of the less common tactics we used was shareholder activism, where a group of shareholders organised by our NGO filed a resolution at the company’s AGM calling for a transition into sustainable plantations.
At that meeting, just 1pc of the total shareholding voted with us. Yet, opinion polls at the time showed that the great majority of the Australian public supported an end to clearfelling of old growth forests. So we looked into who owned these shares. Around a third were owned by Australian superannuation (pension) funds, which are the retirement savings of ordinary workers. Another third were owned by wealthy individuals, many of whom we also knew were strong supporters of forest conservation.
It made me realise there was a real disconnect between the aspirations of people regarding the world they wanted to live in, and the behaviour of their capital out there in the financial markets. I thought: imagine if we could just link people with their capital and ensure that investments truly reflect the goals and aspirations people have for their world.
Over the following years, another movement grew up around sustainability and investment. As more mainstream sell-side analysts and fund managers started to look at sustainability data more carefully (and as that data improved in quality and quantity), it became clear that environmental, social and corporate governance (ESG) issues were not only relevant to values-oriented investors, but they were also drivers of corporate financial performance and risk mitigation. Investors increasingly recognised that these ESG issues needed to be incorporated into investment processes as a core part of being a good investor. Sustainability came to be seen as an important value driver within company boards and among their investors. We now see most large investment institutions with teams of ESG specialists who integrate these issues into investment processes. Institutional signatories to the UN Principles for Responsible Investment (that initiative I led from inception in 2003 until 2013) have ballooned to over 1800, representing more than half of all financial assets globally.
While the “ESG era” is firmly under way, there is a new trend that has emerged over recent years which builds on that foundation. With the launch of the United Nations Sustainable Development Goals (SDGS) in 2015, the scale of the challenge became clearer – over $2 trillion a year for the next 15 years will be required to achieve the SDGS and put a large dent in society’s big problems. Philanthropy and government investment will only provide a small minority of this – private capital will need to do the heavy lifting. When you consider that global household wealth is $280 trillion, it would only take a small nudge to make a huge difference to poverty, education, clean air and the transition to a low-carbon economy. And much of this can be achieved through commercial businesses and investors financing them.
The commerciality of this is key. Healthcare in China and India are growing at double digits. Ed-tech is booming in Silicon Valley, as we try to improve an education system that is no longer fit for purpose. Public transportation, electric vehicles and battery technology to complement renewable energy generation – these are all themes offering opportunities to generate strong returns.
So what’s standing in the way? There are three main barriers to widespread adoption of sustainable and impact investing:
Awareness. 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. We need to spread the word and that’s exactly what I’m doing as part of the UBS Forum in the UK. I am travelling to eight different cities across the country to talk about the exciting possibilities presented by this new way of investing.
Accessibility. The sustainable investing product set has come on a long way over the last few years. But more needs to be done to make it easier to invest. At UBS, we have just launched the world’s first 100pc sustainable portfolio and we are planning more products for the UK over the coming months.
Attitudes. There are still plenty of misconceptions when it comes to sustainable investing. Many people think that you have to sacrifice financial returns when in reality you can expect to get the same if not better returns through sustainable investing. People confuse sustainable investing with philanthropy and don’t understand how sophisticated the sector has become, with institutionalquality fund managers launching new strategies every year. More education is needed and that’s why we’ve created our UBS Forum Guide to Sustainable and Impact Investing. I’d welcome any thoughts or additions.
We have come a long way since I coordinated the drafting of the UN Principles for Responsible Investing in 2005. Sustainable and impact investing were still on the margins and large institutions were only just starting to explore the area.
But we need to do more. We now, arguably for the first time, have a convergence of high quality investment strategies across asset classes, and increasing engagement from clients, both institutional and private.
I believe if we can overcome these key obstacles, we will have done a lot to finally turn sustainable investing mainstream and establish that critical link between capital and the aspirations people have for the world.
Dr James Gifford is the head of impact investing at UBS Wealth Management
‘Global household wealth is $280 trillion. It would only take a small nudge to make a huge difference to poverty’