More of us are choosing sustainable options in all areas of our lives including our finances. Here we look at the rise of responsible and sustainable investing from niche to mainstream and how we approach this at Aberdeen Standard Capital.
A potted history
Responsible investing. Sustainability. ESG (environmental, social and governance). It might feel like everyone in investment management is a bit obsessed with these buzz phrases right now.
But this way of investing is by no means new. And it’s gathered momentum for good reason. People have been managing their finances conscientiously for centuries. Ethical investing stretches back to the 1800s when faith-based groups like Quakers and Methodists wanted to align their investments to their beliefs. These early investors mainly focused on their concerns around temperance and fair employment conditions. With that in mind, they tended to avoid investing in anything related to tobacco, alcohol or gambling, for example.
As the way we live has moved on, this approach has evolved to become much wider in scope, as have our investment options. Over time, the investment themes that have risen in prominence often reflected the social issues of their day. For instance, in the 1960s and ‘70s, the rise of the civil rights movement meant that ethical investing tended to focus on social injustice and inequality. Indeed one of the first US retail ethical funds was aimed at investors who didn’t want companies profiting from the Vietnam War.
In the 1980s and ‘90s, environmental issues became more prominent. This shift was no doubt prompted by a number of manmade environmental disasters like Chernobyl, the Exxon Valdez oil spillage and numerous mining accidents. As a result, some investors started to question the safety of certain industries and to shun coal and other fossil fuel companies.
In the 2000s, the Global Financial Crisis shone a spotlight on issues like executive pay and board accountability. Big corporations were widely criticised for overly focusing on shareholder value and short-term profits over long-term sustainable returns. All this brought the importance of good corporate governance to the fore. It also reaffirmed the role of investors as long-term owners of companies.
All these events and social trends shaped the responsible and sustainable investing sector of today and provided the impetus to drive it forward. And we can clearly see their influence in the development of ESG – environmental, social and governance. Many investment managers now view ESG analysis as a critical component of their investment processes.
Fuelling the growth
Today, we are still living in the shadow of many of these historic events. Widespread social injustice and inequality remain burning issues. Climate change is one of the biggest challenges we face. Many people struggle to access food, clean water, healthcare and education, and we live on a planet with finite resources and a growing population. At the same time, we are dealing with a pandemic that has further divided the ‘haves’ from the ‘have nots’.
Like their predecessors, many of today’s investors want to address these challenges and use their money in a way that makes a tangible difference. There seems to be a moral imperative to build back better after the pandemic.
A recent JP Morgan* survey of investors from 50 global institutions reflected this impetus. Of those polled, 71% said it was “rather likely,” “likely,” or “very likely” that COVID-19 would increase awareness and actions globally to tackle high impact/high probability risks such as those related to climate change and biodiversity losses.
The survey also showed that a growing share of investment processes, products and active ownership practices are integrating ESG principles. Using the broadest classification for the ESG market, assets following global sustainable investment approaches could reach around US$45 trillion by the end of 2020.
Changing investor types is also fuelling growing demand for this type of investment. More women and millennials are joining the ranks of investors – and both have shown greater interest in responsible and sustainable investing.
The importance of ESG
Clearly, responsible investing that channels investors’ money into sustainable investment strategies is no longer something that is just ‘nice to have’. Younger generations of investors especially, don’t want to see society and the environment damaged beyond repair because of their investments. They want to see something that generates a positive outcome and a financial return.
At Aberdeen Standard Capital, we believe that ESG analysis plays an integral part of the investment decision-making process. How a company manages the ESG aspects of its operations and how sustainable it is can affect its performance and its returns to shareholders. Never mind the impact it could have on people and the planet.
Thoughts on the future
The appetite for sustainable investing looks here to stay. This will enable more of us to use our money to make a potential return, while helping tackle some of the world’s most pressing issues.
We believe investors will increasingly expect their investment managers to demonstrate how they invest responsibly. And to incorporate ESG analysis into their processes as standard. Upcoming regulatory changes will also make ESG considerations mandatory in the financial advice process.
Just as in the past, the social trends shaping today’s world will inform the investment solutions and services of the future. Those companies that are developing innovative ideas and ‘fixes’ for some the biggest challenges we face, stand to benefit most from this surge in sustainable investing.
To find out more, please get in touch with your usual contact at Aberdeen Standard Capital.
* JP Morgan, 2020 - https://www.jpmorgan.com/global/research/covid-19-esg-investing